S H I P B R O K IN G A N D C H A RT E RI NG PRACTI CE
LLOYD’S PRACTICAL SHIPPING GUIDES
Corporate Manslaughter in the
Maritime and Aviation Industries
by Simon Daniels
(2016)
ISM Code: A Practical Guide to the
Legal and Insurance Implications
Third Edition
by Dr Phil Anderson
(2016)
Introduction to Marine Cargo Management
Second Edition
by Mark Rowbotham
(2014)
Steel: Carriage by Sea
Fifth Edition
by Arthur Sparks
(2010)
Port Operations: Planning and
Logistics
by Khalid Bichou
(2010)
Port Management and Operations
Third Edition
by Professor Patrick M. Alderton
(2009)
Risk Management in Port Operations,
Logistics and Supply Chain Security
by Khalid Bichou, Michel G.H Bell and Andrew Evans
(2008)
Maritime Law
Sixth Edition
by Chris Hill
(2004)
S HI PB R OKI NG A N D
CH ART E R I NG PRA CT IC E
D r. EVI PLOMAR ITOU
Shipping Consultant at Lloyd’s Maritime Academy
Lecturer of Chartering at Frederick University (Cyprus)
and
ANTHONY PAPADOPO UL OS
Senior Shipping Analyst
EIGHTH EDITION
Eighth edition published 2018
by Informa Law from Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Informa Law from Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2018 Evi Plomaritou and Anthony Papadopoulos
The rights of Evi Plomaritou and Anthony Papadopoulos to be identified as authors of this work
has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and
Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form
or by any electronic, mechanical, or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or retrieval system, without permission
in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to infringe.
First edition published 1980 by Informa Law
Seventh edition published by Informa 2009
British Library Cataloguing-­in-­Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-­in-­Publication Data
Names: Plomaritou, Evi, author. | Papadopoulos, Antonis, author.
Title: Shipbroking and chartering practice / by Evi Plomaritou and Antonis Papadopoulos.
Description: Eighth edition. | Milton Park, Abingdon, Oxon ; New York, NY : Informa
Law from Routledge, 2018. | Series: Lloyd’s practical shipping guides |
Includes bibliographical references.
Identifiers: LCCN 2017034512 | ISBN 9781138826946 (hbk) | ISBN 9781315689609 (ebk)
Subjects: LCSH: Charter-parties. | Ship brokers—Legal status, laws, etc.
Classification: LCC K1182 .G67 2018 | DDC 343.09/65—dc23
LC record available at https://lccn.loc.gov/2017034512
ISBN: 978-1-138-82694-6 (hbk)
ISBN: 978-1-315-68960-9 (ebk)
Typeset in Times New Roman
by Apex CoVantage, LLC
To our beloved daughter,
Anna Maria
CONTENTS
Prefacexix
Introductionxxi
Short Biographiesxxv
List of Figuresxxvii
List of Tablesxxix
Acknowledgementsxxxi
CHAPTER 1
CHARTER MARKET
1
CHAPTER 2
CHARTER RATES AND STATE OF THE FREIGHT
MARKET
43
CHAPTER 3
CHARTERING INFORMATION
83
CHAPTER 4
CHARTERING BUSINESS AND SHIP MANAGEMENT
CHAPTER 5
CHARTERING POLICY AND MARKETING
STRATEGY129
CHAPTER 6
SALES CONTRACT, CARRIAGE OF GOODS BY
SEA AND BILL OF LADING
169
CHAPTER 7
CHARTER FORMS
217
CHAPTER 8
CHARTERING ROUTINES
245
CHAPTER 9
BASIC LEGAL KNOWLEDGE ON CHARTERPARTIES 277
109
CHAPTER 10 COMMON CHARTERPARTY CLAUSES AND
CONCEPTS297
CHAPTER 11 VOYAGE CHARTER
323
CHAPTER 12 TIME CHARTER
349
vii
contents
CHAPTER 13 BAREBOAT CHARTER AND CONTRACT OF
AFFREIGHTMENT
387
CHAPTER 14 FREIGHT CALCULATIONS
415
CHAPTER 15 LAYTIME CALCULATIONS
475
GLOSSARY AND ABBREVIATIONS
525
APPENDICES
Appendix 1Gencon ’94
567
Appendix 2Shellvoy 6
571
Appendix 3Laytime Definitions for Charter Parties 2013
593
Appendix 4Gentime
597
Appendix 5Shelltime 4607
Appendix 6NYPE 2015 (New York Produce Exchange Form)
623
Appendix 7FONASBA Time Charter Interpretation Code 2000
655
Appendix 8Barecon 2001
659
Appendix 9Gencoa
673
Appendix 10 Standard Charterparties679
Appendix 11 Conlinebooking 2016
683
Appendix 12 Letter of Credit – the function of the Bill of Lading
685
Appendix 13 Congenbill 2016687
Appendix 14 Conlinebill 2016689
Appendix 15 Shipman 2009691
Appendix 16 Measurements
713
BIBLIOGRAPHY717
INTERNET SOURCES / FURTHER RESEARCH
725
INDEX729
viii
DETAILED CONTENTS
Prefacexix
Introductionxxi
Short Biographiesxxv
List of Figuresxxvii
List of Tablesxxix
Acknowledgementsxxxi
CHAPTER 1 CHARTER MARKET
1.1
Segmentation of the charter market
1.1.1
Chartering definitions
1.1.2
Charter market segments
1.1.3
Bulk shipping v liner shipping
1.2
Cargoes
1.2.1
Bulk cargoes
1.2.2
General cargoes
1.2.3
Factors affecting whether a cargo is suitable for bulk
or liner shipment
1.2.4
Loading factors for dry and liquid bulks
1.3
Vessels
1.3.1
Bulk carriers
1.3.2
Tankers
1.3.3
Gas carriers
1.3.4
Offshore vessels
1.3.5
Combined carriers
1.3.6
Containerships
1.3.7
Multi-­purpose vessels
1.3.8
General cargo vessels
1.3.9
Reefer vessels
1.3.10 Ro/Ro vessels and passenger ships
1.3.11 Car carriers
1.3.12 Small vessels
1.3.13 Specialised vessels
ix
1
1
1
3
7
11
11
12
13
14
16
16
20
26
29
32
32
35
36
36
38
39
41
41
detailed contents
CHAPTER 2
2.1
2.2
2.3
2.4
2.5
2.6
CHARTER RATES AND STATE OF THE FREIGHT
MARKET
Freight market mechanism
Liner pricing aspects
Determinants of the fixture rate in the open chartering market
Freight market analysis and state of the market
2.4.1
Dry bulk market
2.4.2
Tanker market
2.4.3
Gas carriers market
2.4.4
Containerships market
Freight indices
Freight derivatives
43
43
48
50
51
52
60
69
70
78
79
CHAPTER 3 CHARTERING INFORMATION
83
3.1
Types and importance of information
83
3.1.1
Market reports
83
3.1.2
Orders
84
3.1.3
Position lists
89
3.1.4
Indications
89
3.1.5
Offers/­counter-offers
89
3.1.6
General sources of information
89
3.2
Information centres
91
3.2.1
Baltic Exchange
91
3.2.2
Baltic and International Maritime Council (BIMCO)
92
3.2.3
International Association of Dry Cargo Shipowners
(INTERCARGO)
93
3.2.4
International Association of Independent Tanker
Owners (INTERTANKO)
93
3.2.5
Federation of National Associations of Shipbrokers &
Agents (FONASBA)
94
3.2.6
Institute of Chartered Shipbrokers (ICS)
95
3.2.7
Association of Ship Brokers and Agents (USA) Inc. (ASBA) 95
3.3
Information network
96
3.4
Information coverage
96
3.5
Information handlers
97
3.5.1
Shipbrokers (chartering brokers)
97
3.5.2
Port agents
103
3.5.3
Liner agents
104
3.5.4
Forwarding agents (freight forwarders)
106
3.6
Means of communication
106
3.7
Information flow and time factor
107
CHAPTER 4
CHARTERING BUSINESS AND SHIP MANAGEMENT
4.1
Ship ownership
4.2
Ship management
x
109
109
113
detailed contents
4.3
4.2.1
Ship management definition
4.2.2
Ship management services
4.2.3
Ship management models
Importance of commercial management
4.3.1
Decision-­making in commercial management
4.3.2
Example of vessel routing and chartering alternatives
4.3.3
Commercial management highlights from a
chartering business perspective
113
114
118
122
122
124
125
CHAPTER 5
5.1
5.2
5.3
5.4
5.5
CHARTERING POLICY AND MARKETING
STRATEGY129
Chartering policy of charterers and shippers
129
5.1.1
Charterers’ requirements in the liquid bulk (tanker) market 129
5.1.2
Charterers’ requirements in the dry bulk market
136
5.1.3
Shippers’ requirements in the liner market
137
5.1.4
Decision-­making process and buying behaviour of
charterers and shippers in bulk and liner markets
141
Chartering policy of shipowners
144
5.2.1
Chartering policy of shipowners in bulk and liner markets 144
5.2.2
Commercial risks faced by shipowners in chartering
146
5.2.3
Factors affecting shipowners’ chartering policy in
bulk and liner markets
149
Marketing of shipping companies as a tool for improvement
of chartering policy
152
Shipping marketing with customer orientation
154
Marketing strategy and chartering policy of shipping companies 156
5.5.1
Strategies related to shipping marketing mix
157
5.5.2
Differentiation and positioning strategies
165
CHAPTER 6
6.1
6.2
6.3
6.4
6.5
SALES CONTRACT, CARRIAGE OF GOODS BY
SEA AND BILL OF LADING
General remarks
The sales contract as the basic agreement in the export transaction
Incoterms® rules
6.3.1
Risk, cost and liability distribution in the transport chain
6.3.2
Incoterms® 2010 rules
Documentary Letter of Credit
6.4.1
Introduction
6.4.2
How the documentary credit works
6.4.3
Documents required in the documentary credit
Carriage of goods by sea, transport documents and bill of lading
6.5.1
Introduction to the carriage of goods by sea
international conventions
6.5.2
Relationship between carriage of goods by sea and
other means of transportation
xi
169
169
170
171
172
175
180
180
182
183
184
184
186
detailed contents
6.5.3
6.5.4
6.5.5
6.6
6.7
Bill of lading and other transport documents
187
Bankability of transport documents
196
Interface between the contract of carriage and sales
of cargo
197
6.5.6
Types of bills of lading
198
6.5.7
Electronic commerce
200
Carrier’s liability
203
6.6.1
Liability for cargo under charterparties
203
6.6.2
Sea carrier’s liability statutory regime
204
6.6.3
Compulsory nature of liability rules
206
6.6.4
Scope of application of the international cargo
conventions207
6.6.5
Liability system
208
6.6.6
Cargo claims and time limits
210
6.6.7
Limitation of carrier’s liability
211
6.6.8
Carrier’s liability for inspection and description of
the goods
212
6.6.9
Date of bill of lading
212
6.6.10 Basic features of Hamburg Rules
213
Insurance matters
214
6.7.1
Liability against third parties
214
6.7.2
Cargo insurance and P&I cover
215
CHAPTER 7 CHARTER FORMS
7.1
General remarks about chartering
7.2
Liner and bulk shipping from chartering perspective
7.3
Types of charter
7.3.1
Voyage charter
7.3.2
Time charter
7.3.3
Bareboat charter
7.3.4
Consecutive voyage charter
7.3.5
Contract of affreightment
7.3.6
Space (slot) charter
7.4
Chartering documents
7.4.1
Approved and private chartering document forms
7.4.2
Charterparties
7.4.3
Transport documents
7.5
Management agreements
7.6
Cost allocation per charter type
7.7
“Charter chains”
217
217
218
219
222
225
228
229
230
230
231
232
234
236
238
240
241
CHAPTER 8 CHARTERING ROUTINES
8.1
Chartering negotiation procedure
8.1.1
Stage of investigation
8.1.2
Stage of negotiation
245
245
246
256
xii
detailed contents
8.1.3
Follow-­up stage
Special chartering routines
Rules of chartering negotiation: the Baltic Code of Ethics
270
273
274
CHAPTER 9
BASIC LEGAL KNOWLEDGE ON CHARTERPARTIES
9.1
General legal remarks
9.2
Contract law principles applying to charterparties
9.3
Contracting parties
9.4
Applicable law and legislation
9.5
Court proceedings and arbitration
9.5.1
Court proceedings
9.5.2
Arbitration
9.5.3
Arbitration or litigation (legal action)?
9.6
Evidence
9.7
Construction and interpretation of charter agreements
9.7.1
Design of the charterparty
9.7.2
Offers and acceptance, written or no particular
charter form
9.7.3
“Subject” provisions
9.7.4
Construction and interpretation rules for charter
documents
277
277
279
281
282
283
283
284
285
286
287
287
8.2
8.3
288
290
293
CHAPTER 10 COMMON CHARTERPARTY CLAUSES AND
CONCEPTS297
10.1 Preamble of a charter contract
297
10.2 Parties to the contract
298
10.2.1 Identity of the parties
299
10.2.2 Substitution of owner or charterer
299
10.3 Signing of the agreement
300
10.4 Vessel
300
10.4.1 Nomination, identity and substitution
300
10.4.2 Trading limits
302
10.4.3 Seaworthiness
303
10.5 Lay/Can
304
10.5.1 “Lay”
304
10.5.2 “Can”
305
10.6 Cargo liability and “paramount clause”
306
10.7 War clauses
307
10.7.1 War cancellation clauses
307
10.7.2 War risk clauses
308
10.7.3 War risk clauses in voyage charters and time charters
309
10.8 Effect of cost variations on the contractual relationship
309
10.8.1 Currency clauses
310
10.8.2 Escalation clauses
311
10.8.3 Bunkers clauses
312
xiii
detailed contents
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.8.4 Other clauses dealing with cost allocation
10.8.5 Frustration of charter contract
Arbitration clauses
Time limits
Exception clauses
Maritime liens
Arrest of vessels
General average
Collision
International Safety Management Code (ISM)
Piracy
CHAPTER 11 VOYAGE CHARTER
11.1 Definition
11.2 Vessel
11.2.1 Description of vessel
11.2.2 Specification of vessel’s cargo carrying capacity
11.3 Voyage
11.3.1 Nomination of ports – rotation
11.3.2 Safe port, safe berth, always afloat
11.3.3 Near clause
11.3.4 Ice clause
11.3.5 Sea voyage
11.3.6 Deviation
11.4 Cargo
11.4.1 Type, specification and condition of cargo
11.4.2 Cargo quantity
11.5 Freight
11.5.1 Fixing of the freight
11.5.2 Freight risk – when is the freight earned
and payable?
11.5.3 Deadfreight
11.5.4 Payment of freight
11.5.5 Security for payment of freight
11.5.6 Brokerage
11.6 Loading and discharging
11.7 Laytime
11.8 Routines and allocation of costs
11.8.1 ETA notices
11.8.2 Allocation of costs
11.8.3 Strike clauses
11.8.4 Agents
11.9 Cesser and lien
11.9.1 Introduction
11.9.2 Is the cesser clause justified and valid?
xiv
312
313
314
314
315
316
317
317
319
321
322
323
323
324
324
324
325
325
326
327
328
329
329
330
330
331
332
332
333
334
335
336
336
337
338
339
339
339
340
340
341
341
342
detailed contents
11.10
11.11
11.12
11.13
11.9.3 Exercising the lien
11.9.4 Owners collecting from receivers or shippers
Cargo liability
11.10.1 Owners’ liability when voyage charterparty and bill
of lading are involved
11.10.2 Liability against cargo owners
11.10.3 Cargo retention clauses
11.10.4 Redress
Damage to the vessel
Consecutive voyage charter
Voyage charter and liner business
CHAPTER 12 TIME CHARTER
12.1 Definition
12.2 Vessel
12.2.1 Description of vessel
12.2.2 Vessel’s cargo capacity
12.2.3 Vessel’s speed and bunker consumption
12.2.4 Vessel’s seaworthiness and maintenance
12.3 Trade
12.3.1 Geographical limits
12.3.2 Non-­geographical limits
12.3.3 Breaking of trading limits
12.3.4 Requirements of the trade
12.3.5 Trip time charter
12.3.6 Ballast bonus
12.4 Cargo
12.4.1 Type and specification of cargo
12.4.2 Excluded cargo
12.5 Period
12.5.1 Length of period
12.5.2 Overlap/­underlap – last voyage
12.5.3 Extension of flat period due to off-­hire periods
12.5.4 Delivery and redelivery of vessel
12.5.5 When shall the vessel be delivered and redelivered?
12.5.6 Where shall the vessel be delivered and redelivered?
12.5.7 In what condition shall the vessel be delivered and
redelivered?
12.5.8 Allocation of costs at delivery and redelivery
12.6 Hire
12.6.1 Fixing of hire
12.6.2 Payment of hire
12.6.3 Late payment of hire and owners’ security
12.6.4 Deductions from hire
12.6.5 Payment of last instalment of hire
xv
342
343
343
343
344
344
345
346
347
347
349
349
350
350
352
353
354
355
355
356
357
357
357
358
359
359
360
360
360
360
361
361
363
363
363
364
365
366
366
367
369
369
detailed contents
12.7
Off-­hire
12.7.1 Importance
12.7.2 Off-­hire claim
12.7.3 Grounds for off-­hire
12.7.4 Threshold rule
12.7.5 Loss of time
12.7.6 Loss of money; deduction of off-­hire
12.7.7 Other obligations during off-­hire periods
12.7.8 Insurance for loss of hire
12.8 Damages and pre-­termination of charter
12.9 Routines and allocation of costs
12.9.1 Directions and instructions to the vessel
12.9.2 Master’s position
12.9.3 Customary assistance and overtime
12.9.4 Allocation of costs
12.9.5 Information
12.10 Cargo liability
12.10.1 Liability to cargo owners
12.10.2 Allocation of cargo liability between owners and charterers
12.11 Damage to the vessel
12.11.1 Vessel’s damage from bad weather, collision and
grounding
12.11.2 Vessel’s damage from fuel oil
12.11.3 Vessel’s damage from cargo
12.11.4 Vessel’s damage from other causes
12.11.5 Repair of vessel’s damage
12.12 Protective clauses
CHAPTER 13 BAREBOAT CHARTER AND CONTRACT OF
AFFREIGHTMENT
13.1 Bareboat charter
13.1.1 Definition
13.1.2 Vessel
13.1.3 Commercial operation and management of vessel
13.1.4 Navigation
13.1.5 Manning
13.1.6 Equipment and provisions
13.1.7 Insurances
13.1.8 Maintenance and repair
13.1.9 Assignment of charter or sub-demise or sale
13.1.10 Loading and discharging operation
13.1.11 Delivery of cargo
13.1.12 Hire
13.1.13 Lien and indemnity
13.1.14 Claims against third parties
xvi
369
369
370
371
371
372
373
373
373
373
374
374
375
376
377
377
378
378
380
382
382
382
383
384
384
385
387
387
387
389
391
392
392
392
392
394
394
394
395
395
396
397
detailed contents
13.1.15 Salvage and towage
13.1.16 Cost allocation
Contract of affreightment (CoA)
13.2.1 Definition
13.2.2 Period
13.2.3 Cargo
13.2.4 Vessels
13.2.5 Programme of shipments and nomination procedure
13.2.6 Individual clauses
13.2.7 Shipbrokers’ role
397
397
398
398
404
408
411
412
413
413
CHAPTER 14 FREIGHT CALCULATIONS
14.1 Voyage estimation
14.1.1 Voyage estimate form
14.1.2 Stages of voyage estimation
14.1.3 Voyage estimation example
14.2 Special estimations
14.2.1 Consecutive voyages, CoA and marginal estimations
14.2.2 Time charter estimations
14.2.3 Reefer estimations
14.2.4 Liner estimations
14.3 Tanker estimations
14.3.1 Worldscale
14.3.2 Worldscale practical examples
415
415
417
420
447
453
453
454
455
456
456
457
465
CHAPTER 15 LAYTIME CALCULATIONS
15.1 Introduction
15.2 Time risk during sea voyage
15.3 Vessels’ ETA (Estimated Time of Arrival) Notices
15.4 Vessels’ arrival at the agreed destination
15.4.1 “Waiting for berth”
15.4.2 “Reachable on arrival” or “always accessible”
15.4.3 Clauses designed for specific ports
15.5 Vessels’ readiness
15.5.1 Principal rule
15.5.2 General exceptions from the principal rule
15.5.3 Agreed exceptions from the principal rule
15.6 Notice of vessels’ arrival and readiness
15.6.1 Written notice
15.6.2 Time of NoR provision
15.6.3 Sea notice
15.6.4 Lay/­can
15.6.5 NoR in each port?
15.7 Notice time
15.7.1 Length of notice time
475
475
476
476
476
478
478
479
480
480
480
480
481
481
481
482
483
483
483
483
13.2
xvii
detailed contents
15.8
15.9
15.10
15.11
15.12
15.13
15.14
15.15
15.16
15.17
15.7.2 Notice time before the first layday
15.7.3 Laytime counting during notice time
Commencement of time counting
Laytime allowance
15.9.1 Definite laytime
15.9.2 Calculable laytime
15.9.3 Indefinite laytime
Laytime counting and exceptions
Final analysis and result of laytime
15.11.1 Demurrage and damages for detention
15.11.2 Despatch
Stages and documents of laytime calculations
Liquid and dry cargo laytime
15.13.1 Liquid cargo laytime calculations
15.13.2 Dry cargo laytime calculations
More than one charterer for a specific voyage
Importance of all charterparty provisions
Comparing “Laytime Definitions 2013” with “Voylayrules ’93”
Practical examples
GLOSSARY AND ABBREVIATIONS
484
484
485
487
490
496
497
498
499
502
504
505
507
508
511
514
514
514
515
525
APPENDICES
Appendix 1 Gencon ’94
567
Appendix 2Shellvoy 6
571
Appendix 3Laytime Definitions for Charter Parties 2013
593
Appendix 4Gentime
597
Appendix 5Shelltime 4607
Appendix 6NYPE 2015 (New York Produce Exchange Form)
623
Appendix 7FONASBA Time Charter Interpretation Code 2000
655
Appendix 8Barecon 2001
659
Appendix 9Gencoa
673
Appendix 10 Standard Charterparties679
Appendix 11 Conlinebooking 2016
683
Appendix 12 Letter of Credit – the function of the Bill of Lading
685
Appendix 13 Congenbill 2016687
Appendix 14 Conlinebill 2016689
Appendix 15 Shipman 2009691
Appendix 16 Measurements
713
BIBLIOGRAPHY717
INTERNET SOURCES / FURTHER RESEARCH
725
INDEX729
xviii
PREFACE
The first edition of this book dates back in 1980. The idea was based on a project launched by the Swedish Shipowners’ Association and it was first published
in the Swedish language in conjunction with Liber Hermods, a Swedish editor.
At the same time, the first English edition was published by Lloyd’s of London
Press Ltd., being rather different from the basic Swedish text. The authors of the
original version, Professor Lars Gorton, Mr. Rolf Ihre and the recently passed
away Captain Arne Sandevärn, together with the Lloyd’s of London Press, went
on publishing successfully the next editions of this work up to 2009, when Mr.
Patrick Hillenius joined the author team. Now, on the eighth edition, Professor
Lars Gorton and Mr. Rolf Ihre have decided to leave behind this project, thus
giving a heavy legacy to us.
As the new authors of the present volume, having being taught as University students by past editions of “Shipbroking & Chartering Practice”, our goal is to continue the “journey”, by adopting the same philosophy and seeking the same targets.
The intention of this substantially revised edition is to strengthen the competitive edge of this book, namely:
• To retain the comprehensive, concise, authoritative and easily conceivable writing style.
• To expand the scope, by providing a wide and fully updated coverage of
the subject of shipbroking and chartering practice from a commercial,
financial/­economical, managerial, operational and, to some extent, legal
point of view, analysing all charter markets and addressing to both market practitioners and students.
• To base this work on professional orientation, personal experience, primary research, extensive bibliography and market data sourced from
expert research providers.
• To enrich the text with practical examples on voyage estimations, laytime calculations and chartering negotiations, provide an expanded
analysis of charter markets, an illustration of freight rates for all major
vessel types from 1980 to 2015, a detailed description of Worldscale
principles applying to tanker spot charters, an enlightening presentation
of marketing as a critical tool of improving the chartering policy and a
complete “glossary and abbreviations” section at the end of the text.
• To make an updated and thorough review of common charterparty
clauses, based on current, reputable standard document forms for all
major types of charter (e.g. NYPE 2015).
xix
P reface
It should be mentioned that the reader who needs precise information on specific legal points should refer to specialised literature. Few legal cases, mainly
selected from English and American common law, have been included intending
to illustrate certain principles.
We would like to point out that comments and suggestions are more than welcome. We would appreciate it if the readers shared with us their experience in the
field, as well as highlighting parts of the book which are superfluous or superficial. All such information may be addressed to Informa Law from Routledge, 2
Park Square, Milton Park, Abingdon OX14 4RN.
Finally, we wish to express our gratitude to the Informa group for confiding to
us the substantial revision of this edition.
Dr. Evi Plomaritou, Anthony Papadopoulos.
This edition pays tribute to Professor Lars Gorton,
Mr. Rolf Ihre and in the memory of Captain Arne Sandevärn.
xx
INTRODUCTION
Chartering is the part of international shipping business which broadly deals with
the proper matching of cargoes’ transport needs and vessels’ commercial trading
for the safe carriage of goods by sea. This business activity requires multi-­faceted
knowledge and professional experience.
This volume is concerned with the commercial, economical/­financial, operational, managerial and legal aspects of chartering, offering numerous case studies
and practical examples which clearly link theory to practice.
More specifically, the book is structured as follows:
• Chapter 1 intends to familiarise the reader with basic definitions of
chartering, such as the types of charter, which are considered as a prerequisite knowledge to help reading throughout the book. Then, the fundamentals of chartering are given; namely the vessels, the cargoes, the
trades and the respective market segmentation.
• Chapter 2 completes the charter market analysis, focusing on the
freight rates side. It illustrates how the general state of freight rates
is determined in the open market, which factors affect the fixture rate
of an individual charter, and discusses the fundamental elements of
the four major freight markets – dry bulk, tanker, gas and containerships. The picture is complemented with tables presenting the freight
rates for all major vessel types from 1980 to 2015. Freight indices are
briefly described and freight derivatives are introduced at the end of
chapter.
• Chapter 3 presents the major sources of chartering information, the
most important information centres in the world, how this information
is transmitted within the chartering network and what the means of
communication are. Great emphasis is placed on the description of the
role of the shipbrokers and agents in handling this business data.
• Chapter 4 aims at tracking the location of chartering within the ship
management field. It first introduces some main aspects of shipowning
and ship management. Then, the importance of commercial management of vessels is highlighted, as well as its relationship with chartering
and shipbroking practice.
xxi
I ntroduction
• Chapter 5 investigates modern and innovative managerial aspects of
chartering. Marketing is introduced as the strategic tool which helps a
shipping company improves its chartering policy and profitability. The
chartering policy of shipowners and charterers in bulk and liner markets
is also examined. The stages of marketing implementation are further
presented. Various shipping marketing strategies are illustrated through
real case studies and commercial examples.
• Chapter 6 intends to show the general trading context, by searching
how chartering business is related with the international laws and practices of sales of goods and their transport by sea. Significant subjects are
examined, such as the contract of sale of goods, Incoterms® 2010 rules,
the charterparty and the bill of lading as main contracts of sea carriage,
the documentary letter of credit, the carriage of goods by sea international cargo conventions, etc.
• Chapter 7 deals with the most important types of charter and explains
how they function. Emphasis is given to the most popular types of vessels’ charter, namely the voyage charter, the time charter, the bareboat
charter and the contract of affreightment. Allocation of obligations,
duties, liabilities, rights and costs of the involved parties are briefly
presented per type of charter. Furthermore, standard forms of charterparties per type of charter are introduced.
• Chapter 8 is concerned with a substantial subject of shipbroking and
chartering practice; the chartering negotiations. It provides an analytical and comprehensive description of chartering negotiation procedure,
comprising three stages; investigation, negotiation and drawing-­up of
the charterparty. This chapter is enriched with real practical examples of
orders, position lists and offers, illustrating the cases and the differences
among various charter types.
• Chapter 9 introduces the legal perspectives of the charterparties. Initially, some of the fundamental legal principles applying to charterparties are presented, while the reader gets also familiarised with the
contracting parties, the applicable law and the legislation of the charter
documents. Dispute settlement procedures are discussed and relevant
clauses are commented. Finally, critical rules are examined in respect to
the construction and interpretation of charterparties.
• Chapter 10 is focused on general questions, concepts and clauses commonly applying to all different charter types and shipping contracts.
Various topics of considerable interest are examined, such as the layout
of a charterparty, the identity of the contracting parties, the importance
of a vessel’s description, the vessel’s “seaworthiness” etc.
• Chapter 11 examines in detail typical clauses found and critical matters
accruing from a voyage charter. Issues such as the accurate vessel’s
description, the nomination of safe ports, the execution of the voyage
with utmost despatch and with no deviation, the problems related to the
xxii
I ntroduction
•
•
•
•
•
quantity or the quality of the cargo, the allocation of costs between the
shipowner and charterer etc. are highlighted. The content of the chapter is enriched with examples from real clauses sourced from standard
forms of voyage charterparties; dry and wet.
Chapter 12 discusses the typical clauses and critical matters of time
charter. Aspects such as the description of the vessel, the trading limitations, the period of the contract, the vessel’s delivery and redelivery, the
last voyage, the overlapping/­underlapping situations, the key position
of the master etc. are some of the matters that are thoroughly presented.
The text is enriched with examples of clauses sourced from standard
forms of time charterparties; dry and wet.
Chapter 13 presents two specialised forms of chartering; the bareboat
charter and the contract of affreightment (CoA). Critical topics of the
bareboat charter, such as the vessel, the allocation of obligations and
costs, the vessel’s commercial operation, the vessel’s delivery and redelivery, the manning, the maintenance and repair, the insurance, the hire
payment etc., are presented. Then, analysis is focused on the crucial
subjects of CoA, such as peculiarities and clauses about the period, the
cargo, the vessels, the shipments, the nominations of ports, the charterparty construction, the role of shipbrokers, etc.
Chapter 14 deals with the practical aspects of chartering calculations,
concerning different charter forms and vessel types. Initially, the voyage
estimation principles and stages are examined. Then, focus is placed on
various important terms, but above all on the explanation of the Time
Charter Equivalent (TCE). Tanker chartering calculation particularities
are finally highlighted by following a thorough analysis of Worldscale.
Practical examples are presented throughout the chapter to enlighten the
commercial aspects of chartering and shipbroking business.
Chapter 15 presents the commercial and practical aspects of laytime
calculations. The rules and principles of handling time risks are initially presented. Then, emphasis is given on the explanation of terminology, methodology and calculations of laytime, based on the official
“Laytime Definitions 2013”. A comparative analysis of the latest “Laytime Definitions 2013” against the previous “Voylayrules ’93” follows.
Finally, some practical examples are presented to analytically explain
and enlighten the laytime subjects.
An analytical glossary contains typical terms and abbreviations, commonly used in chartering business.
For better cohesion across the whole manuscript, a short summary has been
inserted at the beginning of each chapter, while links and explanatory references
have been added throughout the text. Practical examples have been used to further elaborate the concepts and practices of chartering business where it was
considered necessary. At the end of the book, there is an extensive bibliography
xxiii
I ntroduction
for every reader who wishes to broaden his knowledge in the field of chartering
and shipbroking.
After the study of this book, the reader should be able to understand the fundamentals in respect of the commercial practices, the economic and financial
issues, the managerial aspects and the legal matters of shipbroking and chartering business before, during and after the execution of a vessel’s charter.
xxiv
SHORT BIOGRAPHIES
Dr. Evi Plomaritou is a Shipping Consultant specialising in Chartering and
Shipping Marketing. She undertakes the planning of chartering policy and marketing strategy of shipping companies, as well as the in-­company professional
training in Greece and abroad. Since 2011, Dr. Plomaritou has been working
as a Shipping Consultant for the Lloyd’s Maritime Academy (Informa Group).
Moreover, since 2008, she has been a Lecturer at the Department of Maritime
Studies of Frederick University (Cyprus) teaching Chartering and Commercial
Ship Management in the BSc and MSc programmes of study.
In 2001–2008, she worked for the Institute of Chartered Shipbrokers (ICS)
providing consulting and training services to shipping practitioners, while she
was actively involved with the foundation of the ICS Greek Branch. She has
taught at the following institutions: Frederick University (Cyprus), European
University (Switzerland), Middlesex University (UK), National & Kapodistrian
University of Athens (Greece), University of Piraeus (Greece) etc. Her writing
experience includes five books and 14 e-­books on the fields of her expertise. In
addition, she has had her research published in leading international academic
journals and conferences. Furthermore, she has a three-year research experience
in maritime projects (funded by the European Commission) at the Research Centre of the University of Piraeus, as well as a nine-month practical experience
onboard bulk carriers.
Dr. Plomaritou was awarded with distinction her “PhD in Chartering Policy
and Marketing Strategy of Shipping Companies” (University of Piraeus). She
holds the “MSc in International Transport” (University of Cardiff, Wales), the
“Advanced Diploma in Transport & Logistics” (Chartered Institute of Logistics
and Transport, UK) and the “Professional Diploma in Dry Cargo Chartering”
(Cambridge Academy of Transport, UK). She has graduated with distinction
from the Department of Maritime Studies of the University of Piraeus (BSc in
Maritime Business).
Mr. Anthony Papadopoulos has been working for the National Bank of
Greece since 2000. For the last ten years he has been serving as Shipping Credit
Officer & Senior Shipping Analyst, responsible for the evaluation of all shipping
finance proposals and the monitoring of the Bank’s entire shipping portfolio in
respect of credit risk. Before that, he held other challenging positions in the Bank,
xxv
S hort biographies
being a Shipping Account Officer & Corporate Underwriter in 2000–2006 and a
Shipping Loan Administration Officer in 2006–2007, assuming responsibilities
related to the management of relations with shipping clients, the submission of
financial proposals to the credit committees, the financial statement analysis of
shipping companies and the review of loan agreements, ship mortgages and other
security documents. Moreover, Mr. Papadopoulos has been an in-­house NBG
certified instructor on the subject of shipping finance since 2013.
In 1998–2000, he worked as a Post Fixture Officer & Operations Assistant for
Danaos Shipping, having tasks related to the freight & hire collection, the post-­
fixture control, the disbursements accounts, the handling of all financial aspects
arising from charterparties and the operational assistance on the managed vessel
fleet. In 1997–1998, he worked also as a Chartering Assistant for Zenith Ocean
Navigation Ltd. In addition, during 1997–2001, Mr. Papadopoulos collaborated
with the University of Piraeus Research Centre as a Scientific Associate in EU
international research programmes.
His work has been published in professional international journals and conferences. It is worth noting that Mr. Papadopoulos, together with Dr. E. Plomaritou
of Lloyd’s Maritime Academy and Professor K. Giziakis of the University of
Piraeus, are the authors of the Greek book titled Chartering (3rd edition, 2010,
reprint 2012, Stamoulis Publications, 1319 pages, with accompanying DVD /
2nd edition 2006 / 1st edition 2002). This has been used as the main academic
textbook in the fields of chartering and maritime economics at the University of
Piraeus and the University of the Aegean, while it has also been a popular title in
the Greek shipping market since 2002.
Mr. Papadopoulos graduated with distinction from the Department of Maritime Studies at the University of Piraeus (1995), he also graduated from the
Department of Banking & Financial Management of the same University (2010),
while he has obtained his postgraduate degree from the University of Wales,
Cardiff, Department of International Transport (MSc in International Transport,
1996).
xxvi
LIST OF FIGURES
1.1
2.1
3.1
3.2
3.3
3.4
4.1
5.1
5.2
5.3
6.1
6.2
6.3
7.1
7.2
7.3
7.4
7.5
8.1
8.2
10.1
12.1
14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9
14.10
14.11
Specific Gravity and API Gravity Correlation for Crude Oil
Varieties
The Spot Market
Dry Cargo Market Report
Tanker Market Report
Daily Panamax Bulker Market Report
Weekly Dry Cargo Market Commentary (12 September 2008)
Ship’s Alternative Types of Deployment
Process of Marketing Implementation in Shipping Companies
Shipping Marketing Strategies
The Tools of Shipping Marketing Mix (“8 Ps”)
The Transport Chain under a FOB Contract
Contractual Relations under the Sales Contract
Documentary Credit Process
Documents in the Chartering – Freighting – Loading Process
BIMCO “Approved Documents”
Charter Types and Documents
Management of Shipping Companies
Allocation of Costs and Risks per Charter Type
Negotiations Procedure
Constructing the Charterparty Document
Section of Gencon’s Box Layout
Diagrammatic Description of Vessel
Voyage Calculation Form
Voyage Calculation Form for Voyage & Time Charter
World Weather Chart
Ocean Currents: Atlantic
Load Line Zones Map and Areas
Load Lines
Deadweight Scale
General Arrangement and Cargo Plan
Vessel’s Costs
Standard Disbursements Account
Dry Cargo Voyage Estimation Example
xxvii
17
45
85
86
87
88
124
153
156
164
173
175
183
232
233
237
239
241
269
272
298
351
421
422
424
425
427
428
431
432
436
440
448
LIST OF TABLES
1.1
1.2
1.3
1.4
2.1
2.2
2.3
World Cargo Fleet
Segmentation of the Charter Market
World Seaborne Trade
Stowage Factors of Important Cargoes
Capesize Bulk Carriers Indicative Spot Trades
Panamax Bulk Carriers Indicative Spot Trades
Handymax/Supramax Bulk Carriers Indicative Time
Charter Trips
2.4
Handysize Bulk Carriers Indicative Time Charter Trips
2.5
VLCC Tankers Indicative Spot Trades
2.6
Suezmax Tankers Indicative Spot Trades
2.7
Aframax Tankers Indicative Spot Trades
2.8
Product Tankers Indicative Spot Trades
2.9
Chemical Tankers Indicative Spot Trades
2.10 LPG Indicative Spot Trades
2.11 Containerships Indicative Types of Employment
2.12 Average One-Year Time Charter Rates of Major Ship Types
(US$ per day): 1980–1997
2.13 Average One-Year Time Charter Rates of Major Ship Types
(US$ per day): 1998–2015
4.1
Ship Management Services
7.1
Allocation of Costs and Risks per Charter Type
12.1
Allocation of Cargo Liability under Inter-­Club NYPE
Agreement 1996 (as amended September 2011)
xxix
5
7
14
15
53
55
55
56
61
62
63
65
66
69
71
76
77
115
242
381
ACKNOWLEDGEMENTS
In our attempt to complete this work, a valuable support was offered by various
parties. It would be an omission if we did not express our sincere thanks to the
following people, companies, organisations and professional bodies:
• BIMCO and in particular Mr. Grant Hunter, for their kind permission to
reproduce a series of BIMCO documents and the “Laytime Definitions
2013” in an appendix. All these have formed the basis of our commentary in chapters 10, 11, 12, 13 and 15.
• Drewry Shipping Consultants Limited and in particular Ms. Antonia
Mitsana, not only for their kind permission to use their market data, but
also because we highly appreciate their efforts to create – on a tailor-­
made and exclusive basis for this edition – the tables which depict the
evolution of time charter rates for all major ship types, from 1980 up to
2015. All this information has been included in chapter 2.
• Clarksons Research and Mr. Hashim Abbas, for their kind permission
to use their data as the basis of our commentary on market coverage in
chapters 1 and 2, as well as for allowing us to reproduce two practical
tanker examples in chapter 14.
• The Baltic Exchange and Mr. Bill Lines, for their kind permission to
reproduce a dry cargo voyage estimation example as presented in the
Baltic Code 2014 and to use that as a basis of our analysis and commentary in chapter 14.
• Worldscale Association (London) Limited and Mr. Ian McCarthy, for
their kind permission to present and explain the Worldscale methodology in chapter 14.
• Federation of National Associations of Ship Brokers and Agents
(FONASBA) and Mr. Jonathan C. Williams, for their kind permission
to include FONASBA Time Charter Interpretation Code 2000 as an
appendix.
• Association of Ship Brokers and Agents (USA) Inc. (ASBA) and Ms.
Jeanne L. Cardona, for their kind permission to include NYPE 2015 as
an appendix.
xxxi
A cknowledgements
• Shell International Trading & Shipping Company Limited and Ms.
Karen Heslop, for their kind permission to include Shellvoy 6 and
Shelltime 4 as appendices.
• International Chamber of Commerce (ICC) and Ms. Marie-­Dominique
Fraidérik, for their kind permission to let us describe the official
Incoterms® rules in chapter 6 and the glossary.
• Simpson Spence & Young (SSY) and Mr. John Kearsey, for their kind
permission to reproduce their dry cargo market reports in chapter 3.
• P.F. Bassoe AS, for their kind permission to reproduce their tanker market report in chapter 3.
• Shipping Guides Ltd., Ms. Barbara Forrest and Mr. Tony Gawn, for
their kind permission to reproduce a world map of international load
line zones and areas in chapter 14.
• UK P&I Club and Mr. Paul Knight, for their kind permission to reproduce a figure about vessels’ load lines in chapter 14.
• IHRDC and Ms. Anne Barton, for their kind permission to reproduce
a figure about specific gravity and API gravity correlation for different
crude oil varieties in chapter 1.
Last but not least, we would like to express our appreciation and gratitude
to all our colleagues from the Informa Group. Special thanks are deserved to
Mr. Stephen Wrench and Ms. Gina Taylor who first believed in us, Ms. Faye
Mousley who initiated this project with great enthusiasm, Ms. Amy Jones and
Ms. Caroline Church who then took over the edition of the book and always
remained so supportive until final completion, but also to Ms. Zoe Everitt who
supervised the smooth production of the book. Finally, it would be an omission
to forget Ms. Marie-­Louise Roberts from Apex CoVantage, who undertook the
technical part of this publication, for her excellent co-­operation.
xxxii
CHAPTER 1
Charter market
Chartering is the part of international shipping business which broadly deals
with the proper matching of cargoes’ transport needs and vessels’ commercial
trading. Thus, this chapter starts by presenting in short a few basic definitions
in respect of chartering, considered as a prerequisite knowledge to help reading
throughout this book. Focus is then turned to the fundamentals of chartering;
namely the vessels, the cargoes, the geography and the types of charter, showing
how they are placed in the international transport scene to form crucial charter
market segments. In respect of the cargoes, emphasis is given on cargo groups
schemed according to their physical attributes, handling requirements, types of
transport, loading factors etc. Concerning the vessels, analysis examines the
various types and sub-­segments structured, according to their size and characteristics, cargoes carried, commercial trades and market elements seen from a
chartering viewpoint. The last but no less important aspect of charter market
analysis concerns the financial element, namely the freight rates which are presented in the subsequent chapter.
1.1 Segmentation of the charter market
This section intends to present how the charter market may be structured according to a variety of criteria. Before proceeding to this type of analysis, a few critical chartering definitions will be presented.
1.1.1 Chartering definitions
A “charter” is the agreement for commercial employment of a ship. It is contracted between two involved parties, the “shipowner” and the “charterer”, the
former representing the ship’s interests and the latter using the ship’s services
either for a specific cargo voyage or for a period of time. In exchange for that, the
charterer undertakes to pay a financial compensation called “freight ” or “hire” in
accordance with the selected type of charter, as described below. The chartering
agreement is confirmed by the chartering contract which is called “charterparty”.
From this short definition of a charter, the type of vessel employment which
concerns the provision of liner services may rather be excepted and the reasoning
will be clear later on in this chapter (see section 1.1.3).
In order to facilitate the understanding of this book, the reader should always
bear in mind that the commercial employment of a vessel may basically be
1
Charter market
distinguished in four major “charter types or forms”1 (for an in-­depth analysis
the reader should refer to chapters 7, 11, 12 and 13):
• Voyage (Spot) Charter: A short-­term type of charter. The shipowner
undertakes to carry on his ship a specific cargo quantity between specific ports, in other words for a specific voyage. The charterer is obliged
to pay the “freight” which is typically calculated in USD per tonne2 of
cargo carried (see appendix 16 about measurements).
• Time Charter: It may be a short, medium or long-­term type of charter. The shipowner concedes the use of his ship to the charterer for an
agreed period of time. The owner keeps the commercial operation of
the vessel (crewing, insurance, repair and maintenance, supplies and
stores), whilst the charterer undertakes the commercial employment
(except navigation) of the vessel (i.e. nomination of ports, payment
of voyage costs etc.). The charterer is obliged to pay the agreed daily
“hire” in regular intervals, for example in USD per day, payable every
15 days or monthly in advance.
• Bareboat or Demise Charter: It is a medium to long-­term type of
charter. The shipowner charters the vessel’s hull and machinery for an
agreed period of time. The charterer undertakes the full control of the
ship (crewing, insurance, repair and maintenance, supplies and stores, as
well as the commercial employment), as he was the shipowner. The charterer is obliged to pay an agreed daily “hire” in regular intervals to the
owner, for example in USD per day, payable every 15 days or monthly in
advance. The shipowner undertakes only the vessel’s capital cost (for an
analytical cost breakdown per type of charter see section 7.6).
• Contract of Affreightment (CoA): It is a medium to long-­term, hybrid
type of charter. The shipowner undertakes to serve charterer’s needs
by carrying specific quantities of homogeneous cargo, in specific dates
and within an agreed period of time (e.g. four shiploads of steam coal
per year), in specific voyages, with no determined ship. The charterer
usually pays the “freight” in USD per tonne of cargo carried in each
executed voyage. It is considered a “hybrid” form of charter.
1 Wilson, J. (2010) Carriage of Goods by Sea (Pearson Education Ltd, 7th edition, pp. 7–8);
Baughen, S. (2015) Shipping Law (Routledge-­Cavendish, 6th edition, pp. 188–190).
2 To avoid any misunderstanding, it is clarified from the outset that the metric system will be
followed throughout this book, except otherwise specified. This is the most widely used system of
cargo measurement in everyday chartering practice. It is noted, therefore, that the terms “tonne”,
“metric tonne”, “metric ton”, “ton” and the respective abbreviated forms “mt” or “MT” are considered synonyms in the context of this book, expressing the metric measurement. Any reference made
to other types of “ton” (e.g. “long ton”, “registered ton”) is denoted specifically in the text. Finally, it
is explained that this book follows the British way of expressing the English language, thus the terms
“tonne” or “metric tonne” are preferred in some parts of the text. However, in chartering practice
where “time is money”, simplified terms often prevail in daily communication, thus the term “metric
ton” (which is the American way of expressing the same metric neasurement) is commonly used in
chartering negotiations, shipping publications and therefore in other parts of this book.
2
Charter market
The term “charter market ” refers mostly to a common place where various
types of charters are fixed, whereas the term “freight market ” describes the
freight rate levels of these fixtures. However, both terms may be interpreted as
synonyms in general. The “freight market” or “charter market”3 may be simply defined as the whole system of freight rate determination by making charter
fixtures. The analysis of such a system should comprise four components: the
geographical place of the market; the persons and legal entities acting in that;
the methodology and business practice of the market; and finally, the rationale
of the market, namely the reasoning behind acts, behaviours and processes, as
well as the inter-­change among persons and conditions within the market. More
specifically, the “charter” or “freight” market may be defined as one or all of the
following4:
• The geographical place where charter fixtures are made, freight rates are
determined and sea transport is bought, sold and executed.
• The individuals and the legal entities which, by expressing their different shipping interests and acting in various ways to achieve their goals,
they finally interact to “close fixtures” (i.e. vessel charters) and form the
freight rate levels.
• A system composed of interdependent persons, entities, factors and conditions, which through financial mechanisms and business procedures,
leads in making vessel charters and forming the freight rate levels of
international sea transport.
Within the shipping business practice, “chartering” may be simplistically
defined as this act or procedure which deals with vessels’ commercial employment, cargoes’ international transport and in many times the appropriate matching of them. Furthermore, “shipbroking” is the act and the mediating profession
which facilitates the business contacts between shipowners and charterers in
order vessel charters to be fixed (the role of shipbrokers is analytically presented
in section 3.5). From the above, the significance of cargoes and vessels in forming shipping market segments becomes obvious.
1.1.2 Charter market segments
The charter (freight) market is not a uniform market following a single trend.
Instead, it consists of a number of different part-­markets, which are not necessarily dependent on one another and can often develop very differently. The
charter (freight) market does not have a homogeneous connection with a specific
3 This book is to interpret those terms as synonyms. However, this chapter focuses on the market
segmentation and thus the term “charter market” is mostly preferred, whilst the second chapter deals
more with freight rate determination and the state of the markets, so the term “freight market” will
be widely used.
4 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 56–57).
3
Charter market
geographical area but rather with ships that can carry similar types of cargo. The
trend or state of the market is determined by the balance between the supply
and demand of shipping services of various kinds. A measure of the state of
the market is the freight rate level which a certain type of vessel can obtain in
various standard trades or charter forms. The freight market is dependent on the
state of world trade and influenced by a plethora of global factors (see further
chapter 2). It should be mentioned also that there is an inter-­relation between the
new-­building market, the second-­hand tonnage market and the freight rate level,
although these are not synchronised in detail. This also means that, like new-­
building, scrapping also affects the freight market.
To define shipping markets a small part of the timeless “Rochdale Report”
written in 1967 may be quoted as follows: “Shipping is a complex industry . . .
the conditions which govern its operations in one sector do not necessarily apply
in another . . . it might even be better regarded as a group of related industries.
Its main assets, ships themselves, vary widely in size and type; they provide the
whole range of services which are needed to carry passengers and a great variety
of goods, whether over shorter or longer distances”.
The shipping market and the charter market accordingly are constituted of
separate segments differentiated as to the type of cargo, the type and size of ship,
the trade routes, the type and duration of charter.5 More specifically:
1. According to the type of cargo, the charter market may be broadly
divided into the dry bulk cargo markets, the liquid bulk cargo markets,
the specialised cargo markets and the general cargo/­container markets.
Moreover, according to the various kinds of commodities, the above
mentioned markets are sub-­
divided further into sub-­
categories (see
section 1.2).
2. According to the type of vessel, the charter market may be broadly
divided into the bulk carrier markets, the tanker markets, the gas carrier
markets, the chemical carrier markets, the combined carrier markets, the
containership markets, the ro/­ro markets, the reefer markets, the general
cargo vessel markets, the multi-­purpose vessel markets, the offshore
markets and the specialised vessels markets. Moreover, according to the
size of vessels, the shipping and charter markets are further sub-­divided
into sub-­categories (see section 1.3).
Table 1.1 shows that the world cargo fleet consisted of over 58,600
vessels with a total tonnage of about 1.7 billion deadweight tonnes
(dwt, see glossary), as of January 2016. Tankers (including chemical
tankers) represented about 13,800 units of 548 m. dwt accounting for
32% of the total cargo tonnage. About 7,700 units of these tankers were
smaller than 10,000 dwt in size. Bulkers represented about 10,700
units of 776 m. dwt, accounting for 45% of the world cargo tonnage.
5 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, p. 57).
4
Charter market
Table 1.1 World Cargo Fleet
Total Cargo Fleet
Vessels (01.01.2016)
Oil Tankers > 10k dwt
Oil Tankers < 10k dwt
Chemical Tankers
Other Tankers
Bulkers
Combos
LPGs
LNGs
Containerships
Multi-­Purpose
General Cargo
Ro-­Ro
Car Carriers
Reefers
Offshore (AHTS/PSV)
Other Cargo
Total World Cargo Fleet
No.
m. dwt
4,510
5,063
3,521
673
10,662
19
1,341
443
5,249
3,211
14,292
1,271
785
1,401
5,430
772
58,643
490.1
13.3
40.7
3.6
776.1
2.8
19.4
35.0
244.3
29.3
31.6
7.7
12.4
5.0
10.0
5.9
1,727.2
Source: Clarksons Research, Shipping Intelligence Weekly (8 January 2016)
There were also almost 5,250 containerships of 19.7 m. TEU6 or 244 m.
dwt, amounting to 14% of the total capacity in tonnage terms. Gas
carriers amounted to almost 1,800 vessels of a small percentage in tonnage terms, as their cargo carrying capacity is commonly measured in
volume terms (cubic metres). Apart from pure bulk carriers and containerships, there are also other types of vessels carrying dry cargoes
(multi-­purpose, general cargo, ro/­ro, car carriers and reefers) which
amounted to almost 21,000 vessels of 86 m. dwt collectively as per
January 2016. Finally, over 5,400 vessels of 10 m. dwt were activating
in the offshore market (this number includes only AHTS and PSVs
which support the offshore market, but excludes platforms, drillships
and other types of vessels used for oil extraction). All numbers were
mentioned only to show an indication of the world cargo fleet breakdown at a specific moment in time, not for a current market update.
Regarding that, the contribution of expert market data providers should
always be sought.
3. According to the type of trade routes, the charter market may be
divided geographically into many segments, for example the Black
6 TEU: Twenty-­foot Equivalent Unit is the cargo carrying capacity measure for containerships.
It practically shows how many containers equivalent to the standard 20-foot box can be carried by
a containership. A TEU is equivalent to one 20-foot shipping container. Thus, a 40-foot container is
equal to two TEUs.
5
Charter market
Sea – Mediterranean Sea suezmax tankers market, the Pacific or the
Atlantic basin capesize market etc.
4. According to the type and duration of charter, the charter market may
be generally divided into the voyage charter or spot market, the time
charter market, the bareboat charter market, as well as other hybrid
charter forms such as the contract of affreightment, the trip time charter
and the consecutive voyages markets.
The type of ship and the type of cargo could be named as the fundamental criteria of charter (freight) market segmentation because ship and cargo are the “major
players” in every commercial sea transport. Trade routes and types of charter could
be defined as the complementary or secondary or determinative criteria of charter (freight) market segmentation as their meaning is explanatory, constituting the
basis for sub-­apportionment of every main market segment ensued from the fundamental criteria. For example, if someone refers to the Mediterranean market, this
by itself is not sufficient to lend meaning and to determine a market section with
common characteristics. A meaning may be obtained only if the secondary distinction is referred to as determinative factor for some of the sections ensuing from the
fundamental distinctions, for example the Med Sea feeder containership market.
At this point, it should be noted that the two fundamental criteria do not operate
cumulatively in forming the market segments. What happens in practice is that a
group of cargoes is transported by one or some categories of ships, or vice versa,
it may also be said that a ship market usually services one or some cargo markets.
Within each charter market segment the transportation requirements of charterers and shippers, as well as the vessel particulars, present common or similar
characteristics. Furthermore, each market segment has different interested parties
(shipowners, charterers, shippers, brokers, agents, etc.) and thus separate networks or channels of information. Contact and interchange among the different
markets may be more or less extensive depending on the type and size of ships
(how specialised or versatile they are), the commodities involved, the distance of
transportation and the type of vessel’s employment.
Charter market segmentation may be depicted in Table 1.2 below. It is a simplified mind-­map attempting to show the trading matching between the fundamental
types of cargoes and vessels, as well as the orientation of each major segment in
broad terms (i.e. bulkers are cost-­oriented, tankers are safety-­oriented and liner
market is quality-­oriented). In addition, it must be noted that the last right column
describes various charter types and the last bottom line shows different examples
of vessels’ geographical trading. All types of charter and all types of trading may
apply to all types of vessels and cargoes without any limitation.
In every market segment the transportation needs, requirements and behaviours of charterers and shippers present some common characteristics. A necessary precondition for the commercial success of a shipping company is the
understanding of the different needs the charterers-­shippers have in the market
segments. Shipping companies ought to adjust their chartering policy and marketing strategy in accordance with those needs. This subject is analysed in chapter 5.
6
Charter market
Table 1.2 Segmentation of the Charter Market
Type of Vessel
↓
Dry
Bulk
Bulk Carriers
C
Tankers
Liquid
Bulk
General Cargo/
Containers
Special
Cargo
Voyage (Spot)
Charter
Consecutive
Voyages
Trip Time Charter
S
LPG, LNG
Carriers
Chemical
Vessels
Type of Cargo
←
S
Contract of
Affreightment
S
Containerships
Q
RO/RO & LO/LO
Vessels
Multi-­purpose
Vessels
Reefer
Vessels
Specialised
Vessels
Combined
Carriers
C
S
Type of Trade →
Global
Regional
C
Q
Q
Q
Q
Q
Q
Round Voyage
Time Charter
Time
Charter
Q
Bareboat Charter
Local/Short Sea
Specific
↑
Type of Charter
Q: Quality Oriented Market C: Cost Oriented Market S: Safety Oriented Market
1.1.3 Bulk shipping v liner shipping
Fundamental is also the segmentation of the shipping market into two major
shipping industrial segments; the bulk shipping industry and the liner shipping
industry. The segmentation criterion used is the size of the cargo consignment
transported by sea. Consequently, the bulk shipping industry transports ship-­
sized parcels of homogeneous cargoes transported in bulk (see section 1.2.1)
while the liner shipping industry transports small general cargo parcels that have
to be grouped for shipment to be carried in containers (see section 1.2.2). The
main differences between the liner and bulk or tramp7 markets are the following8:
• The employment of ships: Bulk (tramp) vessels may be employed in
almost any geographical area depending on the demand for sea transport.
7 The term “bulk” describes the nature of the cargo carried, whilst the term “tramp” refers to
the way of finding vessel’s employment, i.e. vessel’s trading worldwide to serve demand requests.
The terms have similar meaning and are considered synonyms, but the word “bulk” is preferable
throughout this book.
8 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 46–47).
7
Charter market
•
•
•
•
•
Liner vessels are employed in predetermined routes (lines) among specific ports with fixed timetable schedules of sailings and arrivals.
Charter types and contracts: Liner companies typically own some vessels, but also charter-­in ships owned to independent shipowners, on a
period charter basis (e.g. time or bareboat charter). Liner vessels work
on a “common carrier basis”, i.e. various cargoes are booked by many
shippers to be carried (typically in a containership) at the same time by
one ship. “Cargo bookings” are made through an extensive liner agency
network. In other words, liner operators may charter-­in ships based on
charterparty agreements, they book cargoes in accordance with booking
note terms, and cargoes are carried in accordance with bill of lading
terms. In bulk shipping, there is a great variety of all charter types and
contracts, such as spot charters, time charters, bareboat charters, hybrid
charter forms etc. Vessel chartering is made through shipbrokers’ networks. It may be said that the contract of carriage in bulk shipping is
mainly the charterparty, while the contract of carriage in liner shipping
is the bill of lading (see appendices 1–2, 4–11, 13–14).
The type of cargo: The cargoes of bulk shipping are mainly big parcels
(over 2,000–3,000 tonnes) which are sufficiently large to fill a whole
ship or hold. Such cargoes may be dry, liquid or specialised bulks. The
cargoes of liner shipping are basically small parcels (under 2,000–3,000
tonnes) which are not sufficiently large to fill a whole ship or hold. Liner
vessels carry the general cargoes, main types of which are the containers, the loose (break-­bulk) cargo, the pallets, the pre-­slung, the wheeled
cargoes etc.
The kind of carriage: Bulk shipping industry provides transport for
ship-­loads of cargo on “one ship, one cargo” basis, while the liner shipping industry provides transport for small cargo parcels on “common
carrier” basis.
The type of vessels: Bulk fleet mainly includes bulk carriers, tankers,
gas carriers, combined carriers and specialised bulk vessels (e.g. cement
carriers, chemical tankers etc.). Bulk fleet provides transport for bulk
cargoes. Liner fleet is mainly composed of pure containerships. However, there is a variety of other vessel types, such as multi-­purpose vessels, car carriers, ro/­ro and lo/­lo, reefers, con-­bulkers etc. which can
trade either in liner or in tramp services. Liner fleet provides transport
for general cargoes.
The freight: In bulk shipping the freight is negotiable between the parties
depending mostly on the supply and demand of vessels and therefore
on the prevailing general state of the market, as well as on individual
conditions of each charter. In liner shipping the freight paid for the carriage of a container is more or less predetermined by fixed methods of
pricing. Liner traffic is a firmly controlled business where remuneration
is geared more to the long term than to single voyages. The freight rates
in the pricing tables are by definition not subject to the large variations
8
Charter market
and fluctuations that characterise the so-­called open market.9 Nevertheless, liner traffic is susceptible to market variations, depending on market competition, availability of cargo and load factors on each voyage,
where:
Load Factor =
Loaded Cubic Capacity
× 100 ( %)
Available Cubic Capacity
The load factor indicates how much of the available cubic capacity of a
container and the whole containership is made use of. Even though the
liner market has nowadays been concentrated around very few major
shipping alliances, it must be stressed that by law alliance members are
not permitted to jointly set freight rates or share profits, but only to co-­
operate in providing shipping services.
• The type of market: Liner market may be characterised as a competitive market with strong elements of oligopoly (oligopolistic competition) and high concentration of ownership and operation, while the bulk
market may be characterised in general as an almost perfectly competitive market with more dispersed ownership. As an indicative example, in 2015 the top-­25 liner operators owned around 43% of the world
liner fleet in TEU terms but, if charter-­in capacity had been added, they
seemed to control/­operate more than 90% of the global TEU capacity.
Further to that, the top-­25 independent containership owners (so-­called
“charter owners”) owned around 29% of the world liner fleet in TEU
terms. On the other hand, in bulk carriers market, there are many owners
around the globe (e.g. the top-­30 owned almost 26% of the total bulkers
fleet in dwt terms in 2015). Finally, in tankers market, the top-­30 independent shipowners (excluding government fleets) owned almost 35%
of the total tankers fleet in dwt terms in 2015.10
• The seeking of cargo, the type of charter and the chartering business:
In bulk shipping the fixture of charter is carried out by the shipbrokers
through the chartering investigation and negotiation stages (see chapter 8). In liner shipping the seeking of cargo is fulfilled by the cargo
canvassers (e.g. liner agents or freight forwarders) through the advertisement of schedules, ports and dates of arrivals and departures of
liner vessels. Liner vessels get the larger share of their cargo through
an extensive network of liner agents, which either form subsidiaries
of a holding company of the liner group, or are individual agencies
9 In the context of this book, open market is meant to include all the chartering procedures,
people and places where vessels are chartered through brokers’ channels. Therefore, it may be interpreted as comprising the bulk market and the part of the liner market which refers to vessels’ charters
by independent shipowners to liner companies, whereas excluding the part of the liner market which
refers to the provision of vessels’ liner services through cargo bookings
10 Clarksons Research, Shipping Review & Outlook (Autumn 2015, pp. 160–162), www.
alphaliner.com/­top100 (accessed 19 June 2015).
9
Charter market
contracted to work (as exclusive agents or not) representing geographically a liner company or an alliance. Sometimes, a liner company may
also book part-­cargoes or special commodities just to fill empty space.
This may be done on charterparty terms through broker connections in
the open market. Imbalances in cargo volumes between the outward and
homeward legs of a round voyage often make the lines competitors with
the multi-­purpose, con-­bulker, ro/­ro, reefer or other tonnage working in
the open market at the same geographical areas.
• The type of ownership/­management: Bulk vessels are privately-­owned
or publicly-­owned carriers chartered for a particular period or a cargo
voyage, by clients who are called charterers. The ships are usually individually contracted under negotiated terms which are set down in the
charterparty. A simple structure of a bulk shipping group, either a public or a private one, contains typically the single-­ship owning companies (each shipowning company has only one ship as main asset), the
owned managing company which manages the owned/­operated fleet
and possibly a holding company which holds the shares of the shipowning companies (see chapter 4). On the other hand, the typical liner
service requires the use of several vessels for providing a wide coverage of regular services. This type of service is typically operated by
“alliances” of liner companies.11 They pool their shipping resources to
provide a jointly operated liner service, however they must not set common prices. The vessels may be under a single owner or under common
ownership. It must be said that liner shipping was always a controlled
shipping business. In the past the market was structured around the so-­
called “liner conferences” or “rate agreements” which formed types of
cartel or monopoly for particular liner trades. Today, due to strong anti-­
monopolistic policies in the USA and Europe, the liner market is organised with other forms of market control and consolidation, arising from
mergers and acquisitions, takeovers, alliances, freight pools, consortiums etc. Strategically, some liner operators decide to charter-­in vessels
from independent shipowners, against preferring a 100% owned fleet
policy. Shipowning and chartering policy of liners may be determined
by various reasons, for example the financial results of the company, a
possible need of increasing liquidity or repaying part of a heavy debt by
selling owned fleet and chartering-­back vessels, liner service needs and
shippers’ requirements, prevailing and forecasted freight rates, sale and
charter back or charter-­in opportunities, etc. Finally, liner companies
are usually publicly listed mega-­carriers offering integrated, door-­to-­
door logistics services to their clients. Liner operators are usually more
involved than other shipowners in the improvement of cargo-­handling
11 It is worth knowing that global carriers had mutated into four big alliances composed as follows in 2015 (Lloyd’s List, 9.3.2015): “2M” (Maersk, MSC), “Ocean Three” (CMA CGM, UASC,
China Shipping), “G6” (Hapag Lloyd, APL, HMM, MOL, NYK, OOCL) and “CKYHE” (COSCO,
“K” Line, Yang Ming, Hanjin, Evergreen).
10
Charter market
techniques and they often participate actively in developing those ports
at which they call regularly (particularly their hub ports).
Up to this point it must have been clear that bulk and liner markets differ
greatly and structurally. From a chartering and shipbroking perspective, bulk
shipping is far more significant than liner. The following sections of this chapter
will attempt to familiarise the reader with the most known cargoes, vessels and
respective market segments, since this is a fundamental knowledge when speaking about chartering and shipbroking matters.
1.2 Cargoes
This section describes the predominant cargoes carried by the bulk and liner fleet.
Bulk cargo is any cargo that is transported by sea in bulk and in large consignments so as to reduce the unit cost of transport due to economies of scale. Most
often only one bulk cargo is carried at a time, although some ships can carry various bulk cargoes in different holds or on different legs of a voyage. General cargo
concerns smaller quantities of various cargoes. These are shipped together either
in containers or on pallets, in bales, or some other method of assembly (unitisation). The goal is common, to achieve reduced unit cost of transport through
economies of scale, however the means is different, as in the carriage of general
cargo economies of scale are achieved through the cargo unitisation.
1.2.1 Bulk cargoes
Bulk cargo (a big parcel over 2,000–3,000 tonnes) is any individual cargo consignment which is sufficiently large to fill a whole ship or a hold of a vessel and
for that reason it is transported in bulk.12 There are three main categories of bulk
cargoes. The first one includes the dry bulk cargoes, the second one includes the
liquid bulk cargoes and the last one includes the specialised bulk cargoes. Most
of the bulk cargoes concern the major raw material, energy and food trades, such
as oil, iron ore, coal, grain, gas etc. These cargoes may be described as bulk cargoes on the assumption that most of them are shipped in bulk. The bulk cargoes
are transported by suitable vessels of the bulk fleet. Generally speaking, the dry
bulk cargoes are transported by the bulk carriers, the liquid bulk cargoes (including gas) are transported by the tankers and gas carriers and the specialised bulk
cargoes are transported by specialised ships. The bulk fleet is employed in the
bulk shipping industry, which provides transport for ship loads of cargo “on one
ship-­one cargo basis”. The most important categories of bulk cargo are13:
• The “five major dry bulks”: It covers the most important five homogeneous bulk cargoes – iron ore, coal, grain, phosphates and bauxite/­alumina –
which can be transported satisfactorily in a conventional dry bulk carrier
12 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition, p. 419).
13 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition, p. 64).
11
Charter market
•
•
•
•
or a multi-­purpose vessel. Iron ore and coal form almost two-­thirds of the
globally dry bulk market and China has been the largest influencer.
Minor dry bulks: It concerns a great number of various industrial and
agricultural materials that travel in shiploads. The most important types
of minor bulks are steel products, sugar, salt, gypsum, non-­ferrous
metal ores etc. They are transported either by bulk carriers or multi-­
purpose vessels in bulk, or by liner vessels in modes of unitised transport (e.g. containers, bags, pallets, sacks etc.).
Major liquid bulks: It includes the crude oil, oil products, liquefied natural gas, liquefied petroleum gas and liquid chemicals such as caustic
soda, ammonia, phosphoric acid etc. The size of individual consignments varies from a few thousand tonnes up to almost half a million
tonnes in the case of crude oil. They are carried in crude or product
tankers or gas carriers or chemical tankers.
Minor liquid bulks: It includes all other liquid bulk cargoes such as wine,
vegetable oil, water etc. They are carried in small size or specialised tankers.
Specialised bulk or neobulk cargoes: This refers to any bulk cargoes
with specific handling or storage requirements. Steel products, refrigerated cargo, cement, cars and special heavy cargo, for example a prefabricated building, fall into this category. They are carried by specialised
bulk vessels, such as reefers, cement carriers, car carriers, heavy lift
vessels or by containerships in liner trades.
1.2.2 General cargoes
General cargo (a small parcel under 2,000–3,000 tonnes) is any individual cargo
consignment which is not sufficiently large to fill a whole ship or a hold of a vessel
and therefore, too small to justify setting up a bulk shipping operation.14 In addition, there are often high-­value or delicate cargoes that require a special shipping
service and for which the shipper requires an almost fixed price of transport rather
than a fluctuating freight market rate. The main categories of general cargoes are
the containerised cargo, the loose or break-­bulk cargo, the palletised cargo, the pre-­
slung cargo and the heavy cargo. General cargo, either loose or unitised, is transported by liner vessels which offer regular transport schedules. The general cargoes
are transported by fully cellular containerships (FCC) as well as the suitable vessels
of the wider liner fleet which comprise the conventional general cargo vessels, the
multi-­purpose vessels (MPP), or even other types that may be employed occasionally in the liner trades, such as the con-­bulkers, the vehicle carriers, the roll-­on/­roll-­
off vessels (ro/­ro), the reefers and the barge/­heavy lift vessels.
The liner fleet is employed in the liner shipping industry, which provides
transport for ship loads of cargo “on a common carrier basis”.15 The liner fleet
14 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
pp. 36, 41).
15 Many shippers carry their cargoes at the same time on the same ship (common carrier).
12
Charter market
transports small parcels of general cargo (which includes manufactured and
semi-­manufactured goods) as well as many small quantities of bulk commodities (such as malting barley, steel products, non-­ferrous metal ores). Because
there are so many parcels to handle on each voyage, this is a very organisation-­
intensive business. In addition, the transport leg often forms part of an integrated
production operation, so speed, reliability and high service levels are important
(see section 5.1.3). However, cost is also important because the whole business
philosophy of international manufacturing depends on cheap transport. With so
many transactions, the business relies on published prices, though nowadays
prices are generally negotiated with major customers as part of a service agreement. The main categories of general cargo are16:
• Containerised cargo: The standard boxes, usually 8 feet wide, 8 feet
6 inches high and 20, 30, or 40 feet long, filled with cargo. This is the
dominating form of general cargo transport currently. It must be stressed
that the variety of container types is very extensive. For example, some
of the most popular types are the dry cargo containers, the reefer containers, the “open tops”, “flat racks”, “high cubes” etc.
• Loose or break-­bulk cargo: Non-­unitised individual items, such as boxes,
bags, sacks, pieces of machinery etc., each of which to be handled and
stowed separately. All general cargo used to be shipped this way in the
past, but now almost all has been unitised in one way or another.
• Palletised cargo: Cargo packed onto a pallet for stacking and handling.
• Heavy and awkward cargo: Large cargo, difficult to stow.
• Liquid cargo: It travels in liquid containers, deep tanks, drums etc.
• Refrigerated cargo: Perishable goods that must be shipped, chilled or
frozen, in insulated holds of specialised ships called “reefer vessels” or
in refrigerated containers on board containerships.
• Pre-­slung cargo: Small items such as planks of wood lashed together
into standard-­sized packages.
Table 1.3 presents a snapshot of the world seaborne trade breakdown for the most
important commodities in 2014. It is only to show an indication, not a current
update.
1.2.3 Factors affecting whether a cargo is suitable for bulk or liner shipment
The factors which affect whether a cargo is suitable for bulk or liner shipment are17:
• Volume: Many commodities travel partly in bulk and partly as general
cargo. For example, 50,000 tonnes of sugar would be carried in bulk
16 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
p. 65).
17 Plomaritou, E. (2015) Vessels and Voyage Operations (London, Lloyd’s Maritime Academy,
Module 2 of Distance Learning Course “Certificate in Ship Operations”, p. 40).
13
Charter market
Table 1.3 World Seaborne Trade
Cargo
2014 (in mil. tonnes)
Iron Ore
Coal
Grain
Bauxite/Alumina
Phosphate Rock
Minor Bulk
Container
Other Dry
Total Dry
Crude Oil
Oil Products
Total Oil
Gas
Chemical
Grand Total
Coking (Metallurgical)
Steam (Thermal)
LPG
LNG
1,337
262
950
432
105
30
1,434
1,631
969
7,150
1,799
994
2,793
71
248
264
10,527
Source: Clarksons Research, Shipping Review & Outlook, (Autumn 2015, p. 113)
with a bulk carrier, but 500 tonnes of sugar might be carried in sacks
with a general cargo vessel.
• Handling: Several aspects of the cargo are important, such as its handling and stowage characteristics, its susceptibility to damage and some
special requirements from the vessel (for example low temperature,
high pressure, corrosion resistance etc.).
• Seasonality: Some cargoes are seasonal (e.g. grain, sugar etc.) due to the
fact that their production depends on each year’s harvest. For example,
the sugar trade may be carried out either in containers or bags or sacks
by liner vessels or in bulk by tramp vessels, depending on varying needs
of shippers, pattern of trade, vessels’ availability, freight rate levels etc.
• State of the market and expectations of the parties for the market.
1.2.4 Loading factors for dry and liquid bulks
The stowage factor (s.f.) is a crucial term for dry bulk and specialised bulk cargo
stowage and handling operations. It is the ratio of a cargo’s volume (cubic) measurement to its weight, expressed in cubic feet per long ton of 2,240 lb or cubic
metres per metric tonne. It shows how much space a metric tonne or a long ton of
a particular type of cargo occupies in a hold of a cargo ship. The stowage factor
is used in conjunction with a ship’s grain or bale capacities, as well as with a
proper allowance for broken stowage and dunnage, to determine the total quantity of cargo which can be loaded and how it should be stowed (see chapter 14
and glossary). While most commonly used for dry bulk cargoes, stowage factor
14
Charter market
can also be calculated for liquid bulk cargoes and other commodities such as
containers or cars.
Table 1.4 presents indicatively the stowage factors of main types of cargoes.
It may be seen that iron ore cargoes are the heaviest of all quoted ones, therefore
having by far the smallest stowage factors in the table, whereas bulky and/­or light
cargoes, such as cork, pulpwood, woodchips or cars, require much higher volume in relation to their weight to get stowed.18 The following conversion factors
should always be remembered (see also appendix 16 and glossary):
• 1 cubic foot per long ton = 0.02788 cubic metres per tonne
• 1 cubic metre per tonne = 35.88 cubic feet per long ton
On the other hand, liquids fill the tank into which they are put. For this reason, liquid cargoes which are generally handled and loaded in bulk are typically
described by “specific gravity” (abbrev: s.g., synonym: relative density) and not
by stowage factor. The specific gravity of liquids is defined as a dimensionless
Table 1.4 Stowage Factors of Important Cargoes
Commodity
Asphalt (bulk)
Bauxite (bulk)
Cement (bulk)
Coal (bulk)
Coke (bulk)
Cork (pressed bales)
Fertilizers (bags)
Grain – Barley (bulk)
Grain – Barley (bags)
Grain – Wheat (bulk)
Grain – Wheat (bags)
Grain (heavy)
Iron Ore (bulk)
Iron, Pig (bulk)
Pulpwood (average)
Salt
Wood Chips
Containers (TEU)
Cars
Light Crude Oil
Heavy Crude Oil
Water
cub. ft/­long ton
cub. mt/­metric tonne
33–36
25–31
20–36
38–50
45–65
200
50–60
48–54
52–60
45–50
48–53
45
14
10–12
120–150
29–40
110–160
56–105
150
37.6
33.7
35.3
0.94–0.98
0.70–0.85
0.60–1.00
1.08–1.39
1.25–1.80
5.57
1.39–1.67
1.34–1.50
1.45–1.67
1.25–1.39
1.34–1.48
1.30
0.40
0.28–0.33
3.34–4.18
0.81–1.12
3.07–4.46
1.6–3.0
4.2
1.07
0.95
1
18 Rankin, K. (1995) Thomas’ Stowage: The Properties and Stowage of Cargoes (pp. 125–350);
Alderton, P. (1984) Sea Transport: Operations and Economics (Thomas Reed Publications, p. 238);
Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 575–576).
15
Charter market
unit which is the ratio of density of a liquid material to the density of water at a
given temperature (4ο C or 39.2ο F), where density is defined as the material’s mass
per unit volume and is measured in kg/­m3. After mathematical inferences, specific
gravity is defined also as the ratio of the weight of a liquid to its cubic capacity.
Therefore, in shipping terms, the fluid’s volume to be carried can be calculated
using the specific gravity of the fluid and the weight. Conversely, the weight of the
cargo can be calculated if the volume and the specific gravity are known. Specific
gravity is unique to every fluid material and has a very wide range of application.19
It is important to note further that crude oil’s density is an important measure of
its overall quality, as lighter oils are generally easier to refine than heavy oils, therefore tending to have higher value. Even though oil density is sometimes expressed
in terms of its specific gravity, more often it is given as API gravity. As it was mentioned, the specific gravity of a liquid is defined as the density of that liquid divided
by the density of fresh water. Fresh water has a density of 62.4 pounds per cubic
foot. Therefore, for example, an oil variety with a density of 53 pounds per cubic
foot would have a specific gravity of 0.85 (53/62.4). Fresh water, by definition, has
a specific gravity of 1.0. The American Petroleum Institute (API) has developed a
special measure that expresses oil density in terms of API gravity (API degrees or
°API ) which is related to the specific gravity as follows20:
S.G. = 141.5 / (131.5 + °API)
or
°API = (141.5 / S.G.) – 131.5
From these relationships, it is determined that fresh water, with a specific gravity
of 1.0, has an API gravity of 10 degrees, while our 0.85 S.G. oil above has an API
gravity of 35 degrees; almost all crude oils are lighter than water and so they will
have higher API gravities. Figure 1.1 shows the correlation between specific gravity and API gravity for various crude oil and condensate samples, namely crude oils
from different fields, such as Lagunillas (Venezuela), Prudhoe Bay (Alaska), Ghawar (Saudi Arabia), Ninian (offshore UK), and the very light condensate produced
from the Arun Field (Indonesia) which has higher °API therefore higher quality.
1.3 Vessels
This section goes further to examine the most common vessel types, used either
in bulk or liner transport.
1.3.1 Bulk carriers
The bulk carrier is a ship specifically designed to transport quantities of bulk cargoes such as iron ore, coal, grain, steel products, sugar etc. Cargo carrying capacity
19 www.calculator.org (accessed 31 June 2015).
20 www.ihrdc.com (accessed 20 May 2015).
16
Charter market
Figure 1.1 Specific Gravity and API Gravity Correlation for Crude Oil Varieties
Courtesy of IHRDC (www.ihrdc.com, accessed 20 May 2015).
varies from about 1,000 to over 400,000 dwt, trading worldwide. Although a
division into size-­classes cannot be very distinct, there are certain differences
which are recognised in day-­to-­day market discussions.
According to the size of bulkers, the following sub-­
segments may be
distinguished:
• Capesize: Gearless bulk carriers of 100,000 to over 400,000 dwt. They
carry iron ore in long-­haul transportation on routes such as Brazil or
Australia to China, as well as coal on various long-­haul routes. Due to
their size, they are not able to pass through the Panama Canal, therefore they sail round the “Cape of Good Hope” or “Cape Horn”, taking
their name from that. In the daily communication brokers sometimes
use subdivisions for this class, like “Small Capes” for the capacity up to
150,000 dwt, “Normal Capes” for ships of 160,000–180,000 dwt, “Large
Capes” for capacities over 180,000 dwt, “Wozmax” vessels of around
250,000–260,000 dwt,21 reserving “Very Large Bulk Carriers” (VLBC )
or “Very Large Ore Carriers” (VLOC ) for sizes above 200,000 dwt in
general. Some types are named from the ports they mainly serve, such
as “Newcastlemax” of around 200,000–210,000 dwt because they serve
the port of Newcastle in Australia, “Dunkirkmax” of around 175,000
21 Clarksons Research, Shipping Intelligence Network (accessed 7 April 2015).
17
Charter market
dwt for Dunkirk in France and “Setouchmax” of around 205,000 dwt
which serve the ports of Setouch Sea in Japan. The largest capesizes are
nowadays called “Chinamax” or “Valemax”. Their deadweight tonnage
ranges from 380,000 to over 400,000 dwt. Chinamax is a standard of
ship measurements that allows conforming ships to use various harbours
when fully laden, the maximum size of such a ship being 24 m. (79 ft.)
draft, 65 m. (213 ft.) beam and 360 m. (1,180 ft.) length. The Chinamax
name is related to these port restrictions and is derived from the massive
dry-­bulk (ore) shipments that China receives from around the globe.
The Brazilian iron ore company Vale was the first which gradually put
orders (starting from 2008) in Chinese and S. Korean yards for building
a total fleet of 35 such vessels, therefore this size is commonly referred
also as “Valemax” type. Valemax vessels have seven cargo holds with
a total gross volume of almost 220,000 cubic metres. Each hold can be
fully loaded by a shiploader with a loading rate of 13,500 tonnes per
hour. The space inside the cargo hold that cannot be reached by grabs
during discharging, the so-­called “dead spots”, is minimised. With a
deadweight tonnage of 400,000 tonnes, a fully laden Valemax vessel is
carrying as much iron ore as around 11,150 trucks. These ships have a
service speed of around 15 knots while burning almost 100 tonnes of
heavy fuel oil per day. Due to the large size of the vessels the emissions
per cargo ton-­mile are very low and the vessels are among the most
efficient long-­distance dry bulk carriers in service. Valemax use was
extremely controversial and subject to heavy criticism, as it was blamed
for “killing” the already oversupplied dry cargo market, driving down
further the freight rates, thus prolonging the shipping market depression
which started after the global financial crisis in the last financial quarter
of 2008, consequently stalling the freight recovery.
• Panamax: Bulk carriers of 60–65,000 to 100,000 dwt, most of them
gearless except some of the older and smaller ones which are geared.
They are mainly used for transporting coal, grain, iron ore and minor
bulks. “Panamax bulkers” means vessels representing the largest vessels’ measurements allowed in length, beam and draught for passage
through the Panama Canal in loaded condition. The size of the canal
locks determines the maximum size of a ship that can pass through
them. Because of the importance of the canal to international trade,
many ships are built to the maximum size allowed. For many years,
the typical deadweight range for a panamax bulker was up to 80,000
dwt and concentrated within the 68,000–76,000 dwt bracket, whilst its
actual cargo capacity was restricted to about 52,500 tonnes because of
the 12.1 m. (39.6 ft.) draft restrictions within the old locks of the canal.
The largest ship ever transited the old locks of the canal was an Ore/
Bulk/Oil (OBO) vessel 296.6 m. (973 ft.) long and 32.3 m. (106 ft.)
wide, comparing with locks’ width of 33.5 m (110.0 ft.). Besides, in the
last decade, the so-­called “Kamsarmax” vessels of 80,000–90,000 dwt
18
Charter market
were built, which have also the proper dimensions for passage through
the old locks of the Panama Canal and thus included in this segment of
the analysis. These ships serve the bauxite exporting trade from the port
Kamsar in Guinea of West Africa, taking their name from that.
For many years, bulkers’ sizes of 90,000–130,000 dwt used to be called
“Post-­Panamax” or “Over-­Panamax” or “Mini-­Capes” and formed an
interim category between typical panamax/­kamsarmax and capesize vessels. Their role was somewhat restricted in the market place, however it
will get increased in the future after the completion of expansion works in
the Panama Canal, as these vessels will then be able to cross the passage.
After the construction of a third lane of locks in 2016, which is wider,
longer and deeper than the two old ones still working alongside, bulk carriers of up to 130,000 dwt are now able to cross the Canal. Except from
changes in vessel sizes, the Panama Canal expansion is expected to bring
about major alterations in cargo shiploads, vessel trade routes etc.
• Ultramax or Supramax or Super-­handymax: Vessels of 50,000–65,000
dwt, almost all of them geared. They carry grain, coal, minor bulks,
phosphates, bauxite/­alumina etc. on medium-­haul routes. Vessels of
around 60,000–65,000 dwt are usually called “Ultramax” and vessels of
50,000–60,000 dwt “Supramax” or “Super-­Handymax”.
• Handymax: Vessels of 35–40,000 to 50,000 dwt, typically geared. They
carry grain, coal, minor bulks, phosphates, bauxite/­alumina etc. trading
worldwide, usually on relatively short- or medium-haul routes. Larger
vessels of this category compete for cargoes with supramaxes, whilst
smaller ones compete with handies.
• Handysize: Vessels of 20,000 up to 35–40,000 dwt, most of them geared,
trading worldwide, usually on relatively short-­haul routes. They principally carry a wide range of minor bulks and smaller quantities of grain,
phosphates, bauxite/­alumina etc. Many vessels are properly equipped to
transport specialised cargoes, such as logs, woodchips and cement.
• Small bulkers: Vessels of 300–20,000 dwt, geared or gearless. They
carry minor bulks, grain etc. Within this category, the smaller vessels
(300–3,000 dwt) serve coastal and/­or short sea trades, therefore they are
called “coasters” or “short sea traders”.
Although generalisations should be avoided in the dynamic environment of
the shipping markets, the following financial characteristics of the bulk carriers’
market may be distinguished:
• The structure of the market almost follows the perfect competition principles in most sub-­markets (the target is profit maximisation for both
shipowners and charterers, no party may affect the market, great number
of market players exists, transport service is uniform with little margins
of differentiation, few barriers to entry and exit, participants are well-­
informed about market developments, emphasis is on cost control etc.).
19
Charter market
• The larger the vessels:
◦ the more barriers to entry exist and the “players” are (i.e. shipowners
and operators, charterers, brokers);
◦ the higher is the sensitivity/­volatility of freight rates and vessels’ values to the economic cycles;
◦ the less easily liquidated the vessels are.
• Concentration of ownership is relatively low.
• There is a great number of players (owners, charterers, brokers, agents
etc.) located worldwide.
• Vessels are trading worldwide wherever employment opportunities
arise.
• A great variety of charterparty contracts exists.
Bulk carriers can also be used for the transportation of unitised cargoes of
various kinds, like paper and pulp, logs, woodchip, containers etc. A type of bulk
carrier which is able to carry both bulk cargoes in the holds as well as containers
is called “con-­bulker” (10,000–60,000 dwt). A bulk carrier equipped with fixed
or portable upright stanchions and lashing points to allow logs to be loaded on
deck is called “log-­fitted bulk carrier” (10,000–60,000 dwt). “Lumber Carriers”
are similarly able to carry packaged wood products (boards, sheets, plywoods,
planks) in their specially designed holds, which are box shaped to avoid broken
stowage. They have their own gear (gantry cranes) and their size ranges between
15,000–50,000 dwt.
Ships fitted with specialised equipment or designed for a particular cargo, trade
or area have to look to their own specific section of the market in order to charge
the extra rate on top of the current freight rate, which is required to pay off investments in equipment and construction. Examples of these may be bulkers with
a wide hatch called “open-­hatch bulkers” (10,000–105,000 dwt), bulk carriers
equipped with their own grabs or conveyor belts systems for discharge of bulk
commodities called “self-­dischargers” or “self-­unloaders” (10,000–105,000 dwt),
vessels specially constructed with the measurements and fittings required for passage through the St. Lawrence Seaway during the season called “Lakes traders”
or “Lakes-­fitted vessels” (10,000–50,000 dwt) or restricted only to Great Lakes
navigation (“Lakes only” of 10,000–85,000 dwt) and “ice-­class” vessels which
are suitable for trading into the Baltic Sea or to Canada during winter conditions.
Finally, there is a specialised dry cargo market which includes the so-­called
“cement carriers”. These are fully enclosed vessels which handle cement pneumatically, discharging via pipes in which the powdered cement behaves as a
fluid. The size ranges between 10,000–50,000 dwt.
1.3.2 Tankers
The tanker is a ship designed for the carriage of liquid cargo (oil and other petrochemicals) in bulk. Tankers load their cargo by gravity from the shore or by
20
Charter market
shore pumps and discharge using their own pumps.22 Oil tankers vary in size
from small coastal vessels of 1,000 dwt, through medium-­sized ships of about
60,000 dwt, to the giant ULCCs (Ultra Large Crude Carriers) of over 320,000
dwt. According to the size of tanker vessels, the following sub-­markets (sub-­
segments) may be mentioned:
• ULCC (Ultra Large Crude Carriers): Tankers of 320,000–565,000 dwt.
They carry only crude oil. ULCCs are difficult to enter in ports when
fully loaded. The oil tanker Seawise Giant was built in 1979 and was in
service up to 2009 (with various names) when it was scrapped. It was the
largest ship ever by deadweight tonnage (565,000 dwt), length (458 m.)
and displacement (657,000 tonnes). Nowadays, there are only about 50
ULCCs still in operation.23 In 2015, the largest tankers in service were
two sister ships, built in 2002–2003, each carrying 442,000 dwt (3.1
mil. barrels of oil), whilst the mammoth vessels of over 500,000 dwt
had been removed from the market.
• VLCC (Very Large Crude Carriers): Tankers of 200,000–320,000 dwt.
They principally carry crude oil on long-­haul voyages from the Middle
East and West Africa to the Far East and North America. Since the 1950s,
when the tanker market was divided into a “crude” or “dirty” sector and a
“product” sector, there had been a continuous trend towards increasingly
larger tankers, a development which escalated during the late 1970s when
ULCCs were built. Now, the “jumboisation” phenomenon of building
tankers of 400,000–500,000 dwt has gradually faded, so it may be said
that the largest crucial vessels of the tanker market are those of around
320,000 dwt which are able to carry about 2 million oil barrels.
• Suezmax: Tankers of 120,000–200,000 dwt. They carry mostly crude
and rarely oil products when their tanks are coated (only 3% of the
respective fleet was able to carry products in 201524), trading on long
and medium-­haul voyages. Suezmaxes represent the vessels with largest measurements allowed for passage through the Suez Canal in loaded
condition. Besides, they are called “one million barrel vessels” because
of their oil-carrying capacity. Since 2016, suezmax vessels have been
able to pass through the new lane of the Panama Canal, leaving only the
VLCCs/ULCCs as the only tankers without ability to cross this passage.
• Aframax: Tankers of 80,000–120,000 dwt. They carry mostly crude, but
also oil products when their tanks are coated (about 30% of the respective fleet in 201525). An aframax tanker has the capacity to carry around
750–800,000 oil barrels.
• Panamax: Tankers of 60,000–80,000 dwt. They carry both crude and oil
products since most of them are coated (about 80% of the respective fleet
22
23
24
25
Brodie, P. (2013) Commercial Shipping Handbook (London, Routledge, 2nd edition).
Clarksons Research, Shipping Intelligence Network (accessed 15 April 2015).
Clarksons Research, Shipping Intelligence Network (accessed 15 April 2015).
Clarksons Research, Shipping Intelligence Network (accessed 15 April 2015).
21
Charter market
in 2015 ). These vessels are the largest allowed to pass through the Panama
Canal in loaded condition. A panamax tanker was typically able to carry
up to 550,000 oil barrels, whilst this capacity has increased up to 680,000
barrels after the completion of expansion works in the Panama Canal.
• Handysize: Tankers of 10,000–60,000 dwt. They include products,
chemical and other specialised tankers (about 96% of the respective fleet
was coated in 201527). Their capacity ranges from 100,000–300,000 oil
barrels. Since the 2000s vegetable oil has become a popular product for
handysize tankers.
• Small Tankers: Tankers of 100–10,000 dwt able to carry oil products,
chemicals or other specialised liquid cargoes.
26
According to the nature of cargo, the following categories may be recognised:
• Crude Tankers: They include all uncoated tankers above 60,000 dwt carrying crude oil or dirty petroleum products. Their size can theoretically
reach over 500,000 dwt, but practically over 400,000 dwt currently.
• Product Tankers: They have coated tanks (e.g. most commonly by
epoxy, less frequently by zinc or polymer), which enable them to carry
refined petroleum products (clean or dirty). Their size can typically
reach up to the Aframax size of 120,000 dwt, with the exception of some
coated suezmaxes of up to 160,000 dwt.
Furthermore, according to the haul (distance) of cargo carriage and the
size of the vessels, product tankers may also be categorised as follows:
(a) Long Range 3 (LR3): Tankers of 120,000–160,000 dwt (suezmax
size).
(b) Long Range 2 (LR2): Tankers of 80,000–120,000 dwt (aframax
size). LR2 aframax product tankers serve the petrochemical industry, typically carrying naphtha and other clean petroleum products
in long-­haul distances, such as from the Middle East to Japan or
Korea or Europe. Instead, most newbuilt suezmax tankers are typically used to carry either crude oil or even middle distillates of oil
products, e.g. gasoil. Thus, very few of these tankers are built with
such specifications to be capable of carrying clean products. For
this reason, the LR3 product tanker is still rather rare in the tanker
market.
(c) Long Range 1 (LR1): Tankers of 60,000–80,000 dwt (panamax
size). Most of them are used to transport clean petroleum products
on long to medium-­haul routes, such as from the Middle East and
China to the Far East and Europe.
(d) Medium Range (MR): Tankers of 45,000–60,000 dwt.
26 Clarksons Research, Shipping Intelligence Network (accessed 15 April 2015).
27 Clarksons Research, Shipping Intelligence Network (accessed 15 April 2015).
22
Charter market
(e) Handy Products Tankers: Tankers of 10,000–45,000 dwt.
The last two categories concern flexible vessels involved in the short to
medium-­haul petroleum products trade on intra-­Asian routes, as well as
trade from the Middle East Gulf and Indian subcontinent to the Indo-­
Pacific basin and Europe.
• Chemical Tankers: They are defined as tankers that are suitable for chemical trades, because they have either stainless steel or coated tanks. Types
of coating include epoxy/­phenolic coating and zinc/­marine line coating.
These ships can often carry a great number of petrochemical products of
different kinds in separate holds at the same time (parcelling). The size
of a chemical tanker approximately equals that of a small to medium
product tanker (10,000–60,000 dwt). There are also small chemical
tankers for coastal trading able to carry less than 10,000 tonnes.
In accordance with the respective IMO grade of the chemical cargoes
carried, the chemical tankers are typically classified as28:
(a) IMO I vessels which are modern, fully segregated parcel tankers
with fully stainless steel or coated tanks, carrying cargoes of major
hazard (MARPOL Annex II category “X” cargoes);
(b) IMO II vessels which are modern, (not fully) segregated tankers,
with sophisticated coated tanks, carrying cargoes of medium hazard (MARPOL Annex II category “Y” cargoes);
(c) IMO III vessels which are chemical/­
product tankers, carrying
chemicals of minor hazard (MARPOL Annex II category “Z”
cargoes).
As far as the oil cargoes are segmented within the tanker market in
accordance with their quality and clarity, chemicals are the cleaner cargoes, followed by clean petroleum products (CPP) such as naphtha, kerosene etc., then dirty petroleum products (DPP) such as fuel oil, diesel
oil etc. and finally crude oil. From a chartering perspective, it is noted
that chemical cargoes require high degree of vessels’ sophistication thus
they are transported by specialised chemical tankers, while both clean
and dirty oil products are able to be carried by product tankers when
tanks are carefully cleaned between loadings, and crude oil is typically
carried only by large double-­hull crude tankers.
• Specialised Tankers: They carry specialised liquid cargoes (other than
chemicals). Typical such vessels are asphalt and bitumen carriers (200–
30,000 dwt), shuttle tankers (35,000–120,000 dwt) and small tankers
(100–10,000 dwt) carrying water, wine, edible oils, waste and slops, sulphur, methanol, palm oil etc. Sometimes, gas carriers (mainly LNG, LPG)
or offshore vessels may be regarded as specialised tankers. For the purpose of this book these are analysed separately in sections 1.3.3 and 1.3.4.
28 IMO Carriage of Chemicals by Ship and IBC Code (www.imo.org, accessed 12
November 2016).
23
Charter market
Although generalisations should be avoided, some characteristics of the tankers’
market may be found below:
• Most sub-­markets of the tanker market follow the principles of perfect
competition.
• The larger and more sophisticated or more specialised the tankers:
◦ the more barriers to entry exist and thus fewer market participants
(owners, operators, charterers and their respective brokers);
◦ the higher the sensitivity/­volatility of freight rates and vessels’ values to the economic cycles;
◦ the less easily liquidated the vessels are.
• Safety and prevention of oil pollution are of paramount importance for
all involved parties. Regulatory framework is a major determinant of the
tanker market developments. International regulations for tanker ship
safety have become much stricter and oil pollution in any form is not
acceptable. All these rules and regulations are followed by the majority of tanker shipowners competing for charters, whilst charterers have
adopted strict vetting processes for carefully selecting the vessels which
move their cargoes. The crucial regulatory influence in the tanker sector
has been clearly seen by the compulsory and extensive IMO phase-­out
schedule of all single-­hull tankers which was fulfilled up to the end of
2015. It goes without saying that currently all newly built tankers are
double hull constructions.
• Concentration of ownership is relatively low in the tanker market,
whilst in specialised segments or larger vessel sizes the concentration
of ownership usually gets higher. A very important characteristic of the
tanker market has been the dominating position held historically by a
comparatively small number of big charterers called “oil majors”; that
is, the large oil companies. However, in the last 30–40 years the control
of oil transport has changed and their role in transport has been diluted.
In the past it had been typical for the big oil companies to own a considerable fleet of tankers being under their management, but now the trend
is for these companies to sell off and cease business as owners and ship
operators. Instead, independent tanker owners build vessels to charterers’ specifications and place them on charters with them. Oil producers,
especially in the Middle East, now actively market their oil through distribution organisations in the consuming markets and only several have
built their own tanker fleets. New oil companies have emerged in the
rapidly growing Asian markets, with their own transport policies. The
number of smaller private firms (often known as “traders”) and state
organisations engaged in the chartering of tankers increased considerably during the 1980s and their role remains important today. Moreover,
large volumes of oil are now handled by oil traders.
• From a technical point of view, the sea transport of crude oil is carried out in virtually the same way all over the world. The transport of
24
Charter market
•
•
•
•
•
oil derivatives is a more complicated activity. Regarding the transport
tasks, oil cargoes may differ in two important respects; specific gravity
(see section 1.2.4) and standards of cleanliness required.29
The comparatively small number of loading areas and the offshore loading terminals are also typical features of the tanker market, although
there has been a significant increase in the number of loading sites since
the late 1990s.
Oil trades may be affected by the completion of expansion works in the
Panama Canal.
Tankers – especially those carrying crude oil – practically have difficulty in getting return cargoes. Therefore, they are usually forced to
proceed in ballast over an ocean route to a loading area.
Many shipowners prefer to place their ships on time charter for a long
period, but there is also an important spot market for tankers. It is typical that the volume of spot business becomes comparatively larger during a low-­market period, as owners prefer to take the upside potential of
a future freight rate increase.
Tanker charterers, owners and brokers are working with elaborate and
standardised documents, the design of which has been influenced by
the oil companies over the years and which may be used, more or less,
on a “take-­it-­or-­leave-­it” basis. Therefore, the negotiations for a tanker
charter are less complicated than, for example, negotiations in dry cargo
chartering and are normally carried out within a very short space of
time. The problems encountered in tanker chartering are, however, even
greater than those found in other forms of chartering. The art is to hit the
right time for the fixture at a freight level well in tune with the prevailing
market. The fluctuations normally occur very rapidly and with strong
deflections, which may cause the situation to change radically from one
day to the next. This fast movement is due mainly to the quick changes
in oil prices, so the chartering closely reflects the commodity trading.
This relationship was very characteristic at end of 2014 and 2015 when
the slump in oil prices and the “contango”30 oil market led to an increase
in oil trading, the strategic stockbuilding of oil reserves by major economies, the use of older tankers as “floating storage” vessels and consequently to booming tanker freight rates, particularly for the larger sizes.
Owing to the dominating position of oil majors and the comparatively
limited number of parties involved in some segments of the tanker market, every occurrence has a great effect, which sometimes means that
one single fixture may affect the total state of the market for the day. This
is particularly the case in the sub-­markets of larger vessels (e.g. VLCCs).
29 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
p. 441).
30 Contango is a situation where the futures price (or forward price) of a commodity is higher
than the expected spot price (Source: Black, J., Hashimzade, N. and Myles, G. (2009) Contango. A
Dictionary of Economics (Oxford University Press, 3rd edition)).
25
Charter market
1.3.3 Gas carriers
In the past, gas carriers used to be reported as part of the tanker sector analysis,
mentioned as the most important specialised tankers, as long as gas carriers have
certain features common with other tankers used for the carriage of bulk liquids.
Since 2000’s they form an independent, constantly growing market due to their
rapid development and their special features. These are ships designed for the
transport of condensed (liquefied) gases. A liquefied gas is the liquid form of a
substance which, at ambient temperature and at atmospheric pressure, would be
a gas. All gas cargoes are transported in liquid form (i.e. they are not carried as
a gas in its vapour form) and, because of their physical and chemical properties,
they are carried either at31:
• pressures greater than atmospheric, or
• temperatures below ambient, or
• a combination of both.
Liquefied Petroleum Gas (LPG) typically includes a variety of petroleum
gases which are stored and transported as liquids under pressure. Unlike liquefied
natural gas (LNG), LPG does not require cooling to be liquefied. The most common LPG cargoes are butane and propane, however LPG carriers may also carry
ammonia and petrochemicals such as ethylene, propylene, olefins (e.g. butadiene) and vinyl chloride monomer (VCM). Liquefied Natural Gas (LNG) is
the cargo category which includes natural gases (typically methane and ethane)
compressed at moderate pressure but (unlike LPG) cooled to -259°F (-162οC) to
remain liquid. The volume of natural gas as liquid is 1/600th of its volume as gas.
LNG is a clear, colourless, odourless liquid. It is neither corrosive nor toxic. LNG
is stored and transported in insulated pressure tanks or containers.32
The LPG carrier and the LNG carrier are ships specially designed for the safe
carriage of liquefied gas cargoes. The design in cargo tank construction of LNG
and LPG ships can be prismatic, membrane or spherical. Cargo tanks can be
made from aluminium, nickel steel, stainless steel or other highly insulating
materials. An almost unique feature to the gas carrier is that the cargo is kept
under positive pressure to prevent air entering the cargo system. Therefore, only
cargo liquid and cargo vapour are present in the cargo tank and flammable atmospheres cannot develop. All gas carriers utilise closed cargo systems when loading
or discharging, preventing vapour from escaping out in to the atmosphere. In
order to virtually eliminate cargo release to the atmosphere and minimise the
risk of vapour ignition, equipment requirements are of very high standards and
include temperature and pressure monitoring, gas detection and cargo tank liquid level indicators.33 Because of the requirement for heavy insulation at these
31 www.liquefiedgascarrier.com (accessed 25 May 2015).
32 www.businessdictionary.com (accessed 19 February 2016); www.energy.ca.gov (accessed 13
November 2016).
33 www.liquefiedgascarrier.com (accessed 25 May 2015).
26
Charter market
extremely low cargo temperatures and the variation of equipment, the construction cost of these specialised ships is extremely high. All gas carriers are highly
sophisticated, however the LNG carrier is considered the most sophisticated of
all commercial ships. It is worth saying that an LNG carrier may cost about twice
as much as an oil tanker of the same size. As an indication, an LNG cost around
USD 200 million to be built in early 2016.34
According to the size of vessels, the following sub-­segments may be distinguished in the LPG market:
• Very Large Gas Carriers (VLGC ): LPG vessels of about 65,000 cbm
or above. These vessels are fully-­refrigerated and mainly employed
on long-­haul trade routes, e.g. from Middle East Gulf (MEG) and the
United States to Asia. Modern vessels of this size may be called “Very
Large Ethane Carriers” (VLECs) designed to transport ethane in significant quantities.
• Large Gas Carriers (LGC ): LPG vessels of about 45,000–65,000 cbm,
mainly carrying LPG and ammonia between ports where limitations
deter VLGCs’ entrance. West Africa is a major loading area for these
vessels. It is a “niche market” with a limited number of players.
• Mid-­Sizes: LPG vessels of about 20,000–45,000 cbm, typically fully-­
refrigerated, carrying ammonia or LPG, on intra-­
regional routes
(e.g. within the Americas or Asia) and medium-­haul cross-­trades (e.g. in
the North Sea and Europe). This is a “core” sector for global ammonia
trades.
• Handy Gas Carriers: LPG vessels of about 300–20,000 cbm. A diverse
segment which includes semi-­refrigerated, fully-­refrigerated and some
larger, pressurised ships that carry a wide range of cargoes such as ethylene, petrochemicals, LPG and ammonia on short to medium-­haul routes.
According to their specifications the following types of gas carriers may be
recognised, starting from the simplest to the more sophisticated ones35:
• Fully Pressurised Gas Carriers: LPG vessels with cargo capacity of
less than 11,000 cbm, having fully pressurised tanks. It is the simplest
type of a gas carrier, carrying propane, butane and chemical gases.
• Semi or Fully-­Refrigerated and Semi-­Pressurised Gas Carriers: LPG
vessels with cargo capacity of less than 28,000 cbm, carrying a variety of
petrochemical gases except ethylene. Initially with semi-­refrigerated, but
nowadays with fully-­refrigerated and semi-­pressurised tanks. A refrigeration plant is installed on the vessel to provide a fully-­refrigerated
ability while having a high pressure for the cargo tanks, though below
that required for fully pressurised carriage. A reliquefaction plant on
34 Clarksons Research Shipping Intelligence Weekly (8 January 2016, p. 10).
35 www.liquefiedgascarrier.com (accessed 10 June 2015).
27
Charter market
these vessels generally has a substantial capacity and can, if required,
load the cargo as a gas and then reliquefy it onboard.
• Ethylene Gas Carriers: LPG vessels with cargo capacity reaching up to
22,000 cbm. Similar to the semi-­pressurised vessels described before,
but most sophisticated and able to carry also ethylene, fully-­refrigerated
at its atmospheric pressure boiling point. These vessels carry most liquefied gas cargoes except LNG. Having thermal insulation and a high
capacity reliquefaction plant in their cylindrical or bi-­lobe tanks, they
can load or discharge at pressurised and refrigerated terminals, making
them the most versatile gas carriers in terms of cargo-­handling ability.
• Fully-­Refrigerated Gas Carriers: LPG vessels with cargo capacity of
18,000–86,000 cbm, with fully refrigerated tanks. They carry liquefied gases, such as LPG, ammonia and vinyl chloride, at low temperature and atmospheric pressure, in large volumes, over long distances,
between terminals equipped with fully refrigerated storage tanks. Their
prismatic-­shaped cargo tanks, fabricated from nickel steel, allow the
carriage of cargoes at temperatures as low as -48°C.
• Insulated Gas Carriers (LNG): LNG vessels have a cargo capacity which
ranges widely from 1,000–267,000 cbm. Fitted with independent membrane cargo tanks, they are able to transport LNG at its atmospheric pressure
boiling point of approximately -162°C, depending on the cargo grade. Typically, these ships are highly specialised and sophisticated, but in smaller
sizes they may also carry basic LPG cargoes. If an LNG ship is capable
of carrying basic LPG cargoes, a reliquefaction plant is installed to handle
the boil-­off LPG cargo vapours. LNG carriers are typically fully insulated
because it is not cost effective to liquefy methane onboard, although the
first vessels with reliquifaction plants have already appeared in the market.
The LNG sector has been one of the fastest growing shipping markets since
2010, driven by a robust demand expansion in some geographical areas
(e.g. in Asia, South America), the increased regasification terminal capacity (e.g. in China, India) and the opening of new LNG exporting projects
(e.g. in Angola, Papua New Guinea, Algeria, Australia etc.).
Some general characteristics of the gas carriers’ market may be mentioned as
follows:
• Seaborne transportation of liquefied gases began in the 1930s.
• Gas carriers trade worldwide and their useful life may extend over
25 years.
• The gas carrier market is a closed, specialised and highly sophisticated
market, since:
◦ Barriers to entry are high.
◦ Cost of investment is high. Due to that, gas shipping companies
may be listed to stock exchanges, so as to broaden their sources of
28
Charter market
◦
◦
◦
◦
◦
◦
required capital. As most gas carriers are employed in period charter contracts with major charterers, this offers a clearer “visibility”
as concern as the expected revenues of the shipping company and
accordingly it provides the stakeholder with an increased possibility
of earning income from dividends.
Sensitivity/­volatility of freight rates and vessels’ values to the economic cycles is high.
Vessels are not easily liquidated due to high cost of investment and
great specialisation needed.
Specialised know-­how in cargo handling and operations is a
pre-­requisite.
The number of owners, operators, shipbrokers and charterers is relatively small.
Gas carriers, particularly LNG vessels, are commonly built against
long-term chartering contracts (extending even to the whole ship’s
life) from first-­class charterers. In 2015 almost 70% of the LNGs was
employed in period contracts and only a 30% in the spot market.
Owners and charterers, particularly in the LNG market, are almost
long-­standing business partners. Chartering contracts may follow
standard types issued by BIMCO (e.g. Gasvoy for gas voyage charters or Gastime for time charters of gas carriers), or more commonly
follow private contracts issued by major charterers.
• A great effect is expected from Panama Canal expansion in gas trades,
cargo shiploads and vessel sizes.
1.3.4 Offshore vessels
A field related to the oil and tanker market is the offshore sector, concerned with
exploration and exploitation of oil in the open sea with more or less permanently
anchored oil platforms, drilling vessels and drilling rigs. Since the 2000s a special charter market has been developed for such “ships” and for their offshore
servants; the supply ships. The activity on the offshore market varies greatly and
consequently so does the market for supply vessels. To some extent supply ships
can compete for cargoes with smaller tonnage in the short-­sea trades and they
may also be used for towing works.
There are also the technically sophisticated shuttle tankers, the so-­called buoy
loaders and the FPSO/FSO units (Floating Production Storage and Offloading/
Floating Storage and Offloading respectively), which are normally built by owners exclusively for operation under a chartering contract with a specific oil company during a medium to long-time period. These types may in certain situations
be freed for competing in the open market with the regular tanker tonnage.
The offshore vessels’ market is crucially affected by the oil prices. In a global
geopolitical and economic environment of high oil prices, interest for oil exploitation is increasing and so does demand for offshore vessels. Therefore, freight or
29
Charter market
hire rates are increasing. The contrary occurs in an environment of lower oil
prices, for example as from the second-­half of 2014.
The offshore market comprises a great variety of numerous vessels as follows36:
• Mobile Offshore Drilling Units (MODUs): Units engaged in drilling activities, including oil platforms, submersible and semi-­
submersible units,
jack-­up drilling rigs and drillships. A platform is built on concrete or steel
legs, or both, anchored directly onto the seabed, supporting a deck with
space for drilling rigs, production facilities and crew quarters. A submersible drilling rig can be floated to location and lowered onto the sea floor for
offshore drilling activities. A jack-­up rig or a self-­elevating unit is a type of
mobile platform that consists of a buoyant hull fitted with a number of movable legs, capable of raising its hull over the surface of the sea. A drillship
is a conventional ship-­shaped structure, fitted with drilling apparatus, powerful engines and sophisticated propulsion systems. The maximum water
depth where all these units may be active ranges from 1,000–12,000 feet.
• Construction Vessels/Platforms: Vessels involved in the installation of the
infrastructure required for production to start on an oilfield, or conducting
inspection, repair and maintenance activities. They include various types,
such as derrick crane vessels which perform heavy lift operations, pipe
or cable layers, heavy lift vessels, dive support vessels and dredgers.
• Mobile Offshore Production Units (MOPUs): Units engaged in production and processing of oil in remote, deepwater areas, where it would be
impractical to install a fixed, production platform or a pipeline to shore.
The most popular ones are called “Floating Production Storage and
Offloading” (FPSOs). A large number of these structures are converted
oil tankers, although some are purpose-­built.
• Logistics Units: This sector includes floating storage units and shuttle
tankers. A “Floating Storage and Offloading unit ” (FSO) is a vessel that is
normally moored to the seabed adjacent to a Mobile Offshore Production
Unit (MOPU). The MOPU will offload processed oil into the FSO via a
Single Point Mooring (SPM ), and the oil will typically remain in the FSO
until it can be exported to shore via a pipeline or a shuttle tanker. FSOs
are generally converted from merchant tankers that have been retired.
Their size ranges from 10,000–450,000 dwt. A “shuttle tanker” is a ship
designed to transport oil and condensates produced at offshore units or
floating structures to onshore terminals and refineries. Shuttle tankers differ from conventional tankers in their ability to load in open water, through
their bow-­loading and submerged turret equipment, as well as dynamic
positioning systems. Their size ranges from 30,000–160,000 dwt.
• Anchor Handling Tugs (AHT): Tugs for offshore rig anchor handling
with towing capacity ranging between 1,000–25,000 bhp.
36 Segmentation in accordance with Clarksons Research, Shipping Intelligence Network
(accessed 26 July 2015). Description is based on various sources.
30
Charter market
• Anchor Handling Tug Supply vessels (AHTS ): Dual-­
purpose tugs
designed for offshore rig anchor handling and towage, along with
offshore supply duties, with towing capacity ranging between 1,000–
35,000 bhp. They are the backbone of offshore operations and constitute the largest proportion of offshore vessels. Not only do they deliver
supplies (e.g. water, fuel, drilling fluids etc.) to oil rigs and platforms,
but also they provide anchor handling services, towage duties and in
some cases serve as “Emergency Towing Rescue and Recovery Vessels”
(ETRRV ). The largest vessels are primarily utilised in regions with
harsh conditions (e.g. North Sea) or in ultra-­deepwater (e.g. Brazil).
• Platform Supply Vessels (PSV ): Vessels with cargo capacity of up to
8,500 dwt, which support rigs and platforms by delivering materials to
them from onshore. Large PSVs are capable of transporting supplies
over longer distances in harsher conditions, as well as at frontier areas
such as the Arctic and the Barents Sea. Smaller in size but faster ships
typically operate closer to shore in benign sea conditions.
• Rescue Salvage Vessels involved in emergency response activities on
oil & gas fields, or in offshore salvage activities, or in barge tows.
For instance, an “Emergency Response and Rescue Vessel” (ERRV )
responds to emergency situations on offshore structures and its capacity may reach up to 20,000 bhp. An “Ocean Going Tug” is equipped
with large engines and powerful thrusters providing a high level of
manoeuvrability and pulling power, required to tow large offshore units
(e.g. from a shipyard to an offshore location), or even save vessels in
distress. Its towing capacity may reach up to 33,000 bhp.
• Survey Units conducting a range of survey activities (e.g. seismic, geophysical, oceanographic), or Utility Support Vessels including a range
of small vessel types which support the operations of larger and more
sophisticated offshore vessel types.
Some general characteristics of the offshore market are as follows:
• It is a closed, highly specialised and sophisticated market.
• There is an absolute dependence of freight/­hire rates and vessels’ values
to the oil prices and economic cycles. In an environment of abundant
oil supply and low oil prices (e.g. as it was the case in 2014–2017), oil
exploitation becomes unprofitable and offshore vessels get idle whilst
paying huge amounts for fixed running costs.
• Barriers to entry are high, due to high cost of investment. For example,
a 7th generation drillship might have cost over USD 700–800 million to
be constructed in 2013 (in a period of high oil prices).
• Shipowning companies may be listed to shipping exchanges, so as to
secure wider sources of capital.
• Specialised know-­how in operations is a pre-­requisite.
31
Charter market
• Vessels/­units are not easily liquidated due to high cost of investment,
great specialisation needed and absolute dependence of earnings on oil
prices.
• Drillships and oil platforms are typically chartered to the oil majors for
medium to long charter periods. Owners typically build offshore vessels
(particularly the most expensive ones, such as oil platforms and drillships) against secured charter employment from the oil charterers. Spot
chartering activity is very rare.
• Number of owners, operators, shipbrokers and charterers is very limited.
1.3.5 Combined carriers
Combined carriers are the ships that can carry either liquid or dry bulk cargoes.
Most common types of such vessels are:
• OBO: Ore/Bulk/Oil
• PROBO: Products/Ore/Bulk/Oil
• O/O: Ore/Oil
The size of these vessels varies from 30,000–320,000 dwt.
The combination carriers have still a market position, although not in the way
originally intended (about 20 such ships were trading in July 2015). The initial
intention was that those ships would perform combined voyages; for example
carrying dry bulk cargo in one direction and oil cargo on the return leg, thus
improving the round voyage result by reducing the time in ballast and increasing the earning time. Such an operation requires a high degree of flexibility and
skill in the owner’s management and teamwork of staff. The great majority of
“combo” operators, however, prefer to use their ships either as pure tankers or as
pure bulk carriers, depending on which market is offering the best financial result
at the time. This development was also created by the difficulty of combining
freight contracts and also by such practical problems as costs for cleaning the
ships’ holds between the different commodities. Thus, in the past the combination carriers’ role was crucial as they could increase the supply of tonnage on the
market where they were employed and could, therefore, contribute in weakening
an upward trend in freight levels or strengthening a downward trend. This influence has gradually decreased since few combos have been built since the 2000s,
and the older ones are being scrapped without replacements.
1.3.6 Containerships
Fully cellular containerships are the ocean-­going merchant ships, designed and
constructed in such a way to easily stack containers near and on top of each
other in the holds as well as on deck. They carry only standard-­sized intermodal
containers enabling efficient loading, unloading and transport to and from the
vessel. There is a great variety of container types, however the most common
32
Charter market
container has the following dimensions: 8 feet (2.4 m.) width, 8 feet 6 inches
(2.6 m.) height and 20 or 40 feet length (6.1 m. or 12.2 m. respectively). The
vessel’s hull is divided into cells that are easily accessible through large hatches,
but more containers can be loaded on deck atop the closed hatches. Loading
and unloading can proceed simultaneously using giant traveling cranes at special
container berths.
The pure fully cellular containerships are extremely specialised ships trading
only in the liner sector, being subject to competition from versatile ships such as
cellular containerships with Ro/Ro capability which carry containers either in
cells or on truck trailers, modern tween-­deckers of standard type or multi-­purpose
vessels which carry general or dry bulk cargo and containers, con-­bulkers which
carry dry bulk cargoes and containers, or even pure Ro/Ro vessels, reefers, car
carriers and the LASH and SeaBee floating barge systems (called “lighters”) able
to carry containers.
Panama Canal restrictions are of utmost importance for the containership market. Thus, the market is in a transition phase and according to the size of containerships, there are the following, rather vaguely distinguished, sub-­markets:
• Post-­Panamax and Neo-­Panamax: The critical point for a containership
to be named as “Panamax” or “Post-­Panamax” is not its size (i.e. container carrying capacity in TEU), but its beam, thus its ability to cross
the Panama Canal. “Post-­Panamax” vessels are those not able to pass
the Canal. Most of them serve the long-­haul deep sea liner trades and
are gearless. On 26 June 2016, “COSCO Shipping Panama”, a 9,443
TEU fully cellular containership, became the first ship which sailed
through the new locks of the Panama Canal.37 Before this, long and
narrow containerships carrying up to max. 5,300 TEU were the largest
able to pass the Canal. However, after the construction of the third lane
of locks working alongside the two existing ones (built in 1914 when
the Canal opened), containerships of up to 14,500 TEU are now able
to cross this crucial passage. This has created a new segment, the so-­
called “Neo-­Panamax” containerships of 8,000–15,000 TEU, leaving
only those vessels still not able to cross the Canal (over 14,000–15,000
TEU and depending on their designed dimensions) to be named “Post-­
Panamax” or “Ultra Large Container Vessels – ULCV ”. The sizes of
the larger container vessels have been continually increasing to provide
economies of scale. As a result, the total number and carrying capacity of ships in the world container fleet increased very rapidly. As of
September 2017, the biggest containerships in service were two sisterships built by OOCL in 2017 with each having a carrying capacity
reaching 21,413 TEU, whereas orders had been placed for vessels of
over 22,000 TEUs. Vessels of over 8,000 TEU are trading in major liner
routes, such as the Far East – European or Trans-­Pacific trades.
37 www.theguardian.com (accessed 26 June 2016).
33
Charter market
• Intermediary and Old Panamax: Vessels of 3,000–8,000 TEU, either
too wide or not to cross the old locks of the Panama Canal, are currently
deployed on a wide variety of routes, such as Trans-­Pacific and Trans-­
Atlantic main lanes, North–South, non-­mainlane East–West trades and
intra-­regional services. Most of them are gearless. The future of these
boxships looks somewhat uncertain and it remains to be seen whether
they will find new trading alternatives or be scrapped.
• Sub-­Panamax: Their cargo capacity varies from about 2,000–3,000
TEU. Most of them are gearless. They mainly serve North–­South and
intra-­regional services, used to link main lane services with important
secondary ports not covered by direct liner calls.
• Handysize: Their cargo capacity varies from about 1,000–2,000 TEU
and they are involved with regional, short sea, draught restricted or
feeder liner trades, similarly to the “sub-­panamaxes”. Most of them are
geared.
• Feeder/Feedermax: Their cargo capacity varies from about 100–1,000
TEU and they are trading in smaller, niche, regional, short sea, draught
restricted or feeder liner trades. Most of them are geared.
There is a positive correlation between vessel’s size and speed. For example,
the feeder ships of 100–1,000 TEU may have an average speed of 15–17 knots,
while the biggest ships of over 3,000 TEU an average speed of 21–26 knots. This
reflects the fact that smaller ships generally operate on shorter routes where high
speed brings fewer economic benefits. Whereas a general cargo ship may spend
much of its life in port loading and discharging cargo, a modern containership
can be turned around in 36 hours or less, spending little of its time in port.
In general, the most important features of the containerships’ market are the
following:
• Containerships are always employed in regular lines. The ships are either
owned and operated by liner companies which run their own liner network,
or they may be owned by independent shipowners who charter them out
(typically in period or bareboat charters) to these lines. As a consequence of
this structure, the spot charter market is of little importance to the containerships. Furthermore, the time charter market for containerships has proved
to be one of the first which can react to a change in the state of the world
trade. This is probably so, because these ships are employed in the worldwide movement of finished, semi-­finished and some agricultural products.
• The larger the containerships:
◦ the more barriers to entry exist either for the liner operators or for the
independent shipowners;
◦ the higher is the sensitivity/­volatility of vessels’ values to the economic cycles;
◦ the less easily liquidated they are.
34
Charter market
• The current trend is to build bigger and bigger ships, for the liner companies to reduce unit cost of transport through economies of scale and
respond to huge fixed costs.
• Concerning the involved parties, the containerships market has a
twofold dimension. On the one hand, in the liner business aspect the
involved parties are the liner operators (companies), the shippers, the
liner agents and the freight forwarders. Their scope is to book cargoes
under a “booking note” and transport them by regular lines under a “bill
of lading” (see appendices 11 and 14). On the other hand, liner companies charter-­in vessels from independent shipowners through specialised shipbrokers’ networks in the open market, typically under a period
charterparty (time charter or bareboat). This is the most important part
of the containerships market from a chartering/­shipbroking perspective.
• Containerships are employed in a global liner network, having long
established their place, especially in traffic plying among highly industrialised areas (USA, Europe, Asia) with a technically advanced inland
transportation system in both the exporting and the importing areas.
This traffic requires large investment in specially equipped vessels, port
installations and terminal equipment. The liner network is expanded
through “hub and spoke” systems, where the containers are initially
transported in main lanes (e.g. Trans-­Atlantic, Trans-­Pacific, Asia-­
Europe etc.) and then trans-­shipped in smaller feeder vessels trading in
regional routes (e.g. in the Mediterranean Sea) to reach their destination.
• Containerships are often operated by international alliances, joint venture organisations, consortia and pools, because of the high investment
costs involved, for multi-­national marketing purposes and to meet the
customers’ demand for total and value-­added services.
It must be noted that there is some overlapping between the employment of
liner and tramp vessels. When freight rates for various dry cargoes increase, charterers look at alternative shipping solutions. Thus, some trades that used to be
reserved for the bulk carriers or multi-­purpose vessels or reefers etc. in pure bulk/­
tramp markets, they may become fully containerised and executed by pure containerships or general cargo liners or reefers etc, in a liner network. This applies
not only to unitised cargoes, but also to pure bulk cargoes.
1.3.7 Multi-­purpose vessels
A multi-­purpose vessel (MPP) is capable of carrying at the same time different
types of dry (bulk or general) cargo and containers, requiring different methods
of handling. Con-­bulkers and barge carriers are not included in this segment.
MPPs are small and versatile ships. They are non-­fully cellular container capable vessels, thus not equipped with fixed cell guides in all holds but with partial
coverage and/­or portable guides. Their container carrying capacity is at least 100
TEU, whereas their typical cargo-carrying capacity in tonnage terms varies from
35
Charter market
8,000–25,000 dwt. They normally have a relatively high TEU/Dwt ratio. There
are several types of ships falling into this category, for instance the ships which
can carry roll on/­roll off (ro/­ro) cargo together with containers. Concerning the
dry cargoes carried, particularly minor bulks are those transported either as dry
bulk cargoes or as general cargoes.
MPPs are trading worldwide, by offering either tramp or liner services. They
can be single-­deckers or tween-­deckers and they are always geared. Their market
structure follows the principles of perfect competition. Cost control is of importance for all involved parties. Concentration of ownership is very low. Ownership, charterers and brokers are extremely dispersed around the globe. MPPs
are subject to fierce competition by containerships, general cargo vessels, small
bulkers, con-­bulkers, ro/­ro vessels, reefers and other types of liner and tramp
ships.
1.3.8 General cargo vessels
In this wide category, various types of vessels may be included, such as tween-­
deckers, break bulk freighters, cattle carriers, pallet carriers, timber carriers etc.
Sophisticated general cargo vessels are mostly built with a certain type of trading
in mind, for example, forest products may be carried by “timber carriers” within
the capacity brackets of about 6,000–20,000 dwt, or livestock may be carried
by “cattle carriers”. A standard type tween-­decker now generally means a vessel of 17,000–23,000 dwt with her own gear of derricks and/­or cranes and with
one tween-­deck throughout. Tween-­deckers may be categorised either as multi-­
purpose or as general cargo vessels.
Prior to the days of containerisation, all cargo was carried on what were known
as general cargo ships. The cargo was known as break-­bulk cargo, i.e. non-­
unitised general cargo including bags, sacks, individual items etc. With the
advent of containerisation there are fewer general cargo ships. Generally, they
carry cargo that is too large to be carried in a container, for example, steel, rolls
of wire and machinery. However, they also carry boxed goods that are too small
to justify the use of a full container.
Conventional general cargo vessels mostly trade in regional, secondary lines,
though they may be also employed in tramp markets. Vessels ownership may
belong to the liner companies or to independent shipowners which charter them
either to liner operators or in the open market. Within this sector, the “general
cargo liners” are faster tween-­deckers designed for liner trades before containerisation (usually over 5,000 dwt, with a high Dwt/TEU ratio and high service
speeds), whereas “general cargo tramps” are slower general cargo vessels.
1.3.9 Reefer vessels
The reefer is designed to carry goods requiring refrigeration, such as meat
and fruits. This ship has insulated holds into which cold air is passed at
the temperature appropriate to the goods being carried. Reefers are trading
36
Charter market
worldwide and their carrying capacity is measured in volume terms reaching
up to 460,000 cu.ft. They may be operated in the open market, when their
operation is similar to that of a bulk carrier, or in secondary/­regional/­short-­sea
trades of the liner market (in complement or in competition to the containerships). Most reefers being built today have permanent fittings on deck and on
top of the weather deck hatches for reefer containers, to increase the carrying
capacity and to meet special requirements from customers. This also enables
the owners to compete with the regular lines, or even to be employed in certain
liner trades.
The major competitor to specialised reefer ships is the ever-­growing container
fleet. The comparison between the total boxship reefer capacity and the reefer
capacity of pure reefer vessels shows an overwhelming predominance of the containerships over the years. Due to that, the reefer fleet is rather aged and orders
for new vessels are dwindling.
In order to improve profitability and survive in this fierce competition, if the
freight levels permit, reefers are able to carry also a variety of dry products, such
as bagged cargoes, paper, lightweight unitised cargoes, containers or even cars.
The vessels will then be in straight competition with various other ships, such
as tween-­deckers and multi-­purpose ships operating in the open market, general
cargo liners, small bulkers, ro/­ro, or even car carriers.
Within this sector there are various vessel types, however the most popular
ones are the “pure reefers” with fully refrigerated holds, the “freezers” being able
to carry frozen cargo, the container capable reefer vessels which carry containerised refrigerated cargo, the “general cargo reefers” being capable of carrying
also break-­bulk cargoes, as well as the reefers with ro/­ro capability which may
load wheeled cargoes.
Some general characteristics of the reefer vessels’ market are the following:
• The reefer market is closed, specialised and highly seasonal. There is
intense seasonality, since demand for such vessels peaks on first-­half
of the year when the products of the southern hemisphere are bound for
shipment to Europe, the USA and Japan. Bananas, and to a large extent
meat, are transported year round, while fish, citrus and other fruits, vegetables and potatoes are seasonal.
• Barriers to entry are high.
• Sensitivity/­volatility of freight rates and vessels’ values to the economic
cycles is relatively high.
• The number of owners, operators and reefer shipbrokers is small. Charterers are often large organisations, state or private. Sometimes a reefer
charter is made directly between owners and charterers without the
assistance of brokers.
• Reefer ships are employed to a large extent in contract trading, but there
is also an important spot market. Demand for transport depends on
crop outcome in various geographical areas. Sudden problems in some
supplying areas may cause drastic re-­routing of reefer vessels even
37
Charter market
overnight but, in general, the shipping programmes and the contractual
engagements follow very strict schedules and require perfect timing.
• The loading areas are worldwide but the discharging areas are concentrated primarily in Europe, the USA and Japan. Thus, the routes are “one
way” and there is a huge imbalance geographically in the distribution of
the loading/­discharging areas.
• Reliable technical equipment, great skill in cargo handling and treatment during the sea voyage are very important. Economy is achieved
by reducing ballasting to a minimum and by always using a vessel’s
maximum cargo capacity. In order to reduce the time and costs in port,
reefer trades use palletisation.
• The future of reefers is uncertain, since containership reefer capacity
has long outreached the capacity of conventional reefers. Since a 1999
peak, the reefer fleet has been steadily declining.
1.3.10 Ro/Ro vessels and passenger ships
The ro/­ro vessel is designed to accommodate wheeled cargo that is rolled-­on
and rolled-­off aboard through the ramps of the vessel, cargo that is shipped
aboard by lift-­on/­lift-­off (lo/­lo) equipment (e.g. fork-­lift trucks), containers
and/­or break bulk cargo. A ro/­ro vessel can be self-­sustaining. Equipped with
large openings at bow and stern and sometimes also in the side, the ship permits
rapid loading and discharge with hydraulically operated ramps providing easy
access. Fully loaded trucks or trailers carrying containers are accommodated
on inside decks.
The ro/­ro market as a sector of its own was established rather late. Initially
these ships were typical short-­trade carriers in trades between highly industrialised countries. Several circumstances have, however, transformed these vessels
to whole ocean traffic “players”.
During the 1970s the movement overseas of industrial products, machinery,
vehicles and building materials increased considerably, especially from Europe
and the United States to the Middle East, as well as from Europe to West Africa.
The ports in the importing countries had a low capacity at the time and, therefore, ran into serious congestion caused by too many vessel arrivals and the inability to cope with the increasing quantity of cargo. At the same time, the liner
companies trading to these areas with conventional general cargo ships began
to renew their fleets. One solution to these problems was the ocean-­going ro/­ro
ship, requiring a minimum of port installations, with a very fast and flexible
cargo-­handling system and able to accommodate a mixture of commodities, not
restricted to rolling units but able to load all goods movable by fork-­lift truck
and also containers.
In respect of passenger traffic, large-­size tonnage with accommodation only
for passengers is now primarily engaged in cruising. Most passenger vessels
are operated in short-­distance routes with consecutive trips on tight schedules,
the so-­called “ferry traffic”. These ships mostly have a good capacity for rolling
38
Charter market
goods and they are a supplement to the pure cargo ro/­ro ships operating in the
same trading area. The market for passenger ships is very much dependent on
seasonal variations.
Apart from cruise ships and pure passenger ships that do not carry cargoes,
within this sector there is a great variety of other merchant vessels, as for example the “ro/­ro freighters” with roll-­on roll-­off ramps and accommodation for few
drivers/­passengers, the “passenger/­car ferries” with high passenger capacity in
respect to cargo carried, or the “ro/­pax vessels” with a higher emphasis on carrying cargo than passengers.
Some general characteristics of the Ro/Ro vessels’ market are as follows:
• Although ro/­ro vessels are flexible and versatile in their trading, their
market is rather a closed and extremely specialised one, since:
◦ Barriers to entry are relatively high, particularly for the larger vessels
which are more expensive to be built. Thus, ship ownership is relatively concentrated.
◦ Sensitivity/­volatility of freight rates and vessels’ values to the economic cycles is high.
◦ Smaller vessels are more easily liquidated than larger ones.
◦ The wide range of transported cargoes may sometimes require specialised know-­how in cargo handling. Each trade has its own peculiarities which vary greatly. Ports of call vary widely too.
◦ The vessels have to compete with the containerships and survive
within this market.
• Ro/Ro ships are able to trade globally. Their use is important where port
facilities are not well developed. Therefore, they usually operate in liner
services such as in the North–­South (e.g. USA–South America, Europe-­
Africa) and regional trades (e.g. Intra-­Asian) or in short-­sea/­coastal services or even in the open (tramp) market.
• There are specialised shipbrokers for the chartering of these vessels and
some even specialise in only one of the ro/­ro segments.
1.3.11 Car carriers
Car carriers are designed to transport fully assembled vehicles and cars. They are
able to carry 2,000–8,500 vehicles by roll-­on/­roll-­off type of loading. Such ships
are typically characterised by hoistable and strengthened decks to enable the
transportation of “high and heavy” vehicle cargoes. Most vehicles are medium-­
sized passenger cars, but lorries, trucks, tractors and buses are also transported.
This sector of the market has gained importance in the last few decades. In addition and parallel to the trade of fully assembled vehicles, there is a trade in used
cars from Europe, the USA and Japan to Africa, South America and Asia, as well
as an important volume of car parts, so-­called “Cars Knocked Down” (CKD),
for assembly in factories at the receiving countries. These cargoes may be carried
either by car carriers or by other liner vessels.
39
Charter market
The overseas transportation of cars in the big-­volume trades is carried out by
very large purpose-­built vessels, so-­called “Pure Car Carriers” (PCC ), whilst
the car carriers specially built to accommodate also large vehicles are called
“Pure Car Truck Carriers” (PCTC ). Each has a typical capacity of 2,000–7,000
“Car Equivalent Units” (CEU ), although the “Large Car Truck Carrier” has
been introduced which is able to accommodate over 8,000 CEU. The loading/­
unloading of a PCC/PCTC is procured by ro/­ro methods and is extremely fast.
All mass transportation of fully built-­up vehicles is done by the ro/­ro mode in
PCCs, ro/­ro ships and ferries. One good reason for this is that shippers of cars
normally refuse shipment by lo/­lo tonnage (lifting methods) when ro/­ro is available. Smaller volumes of cars (from just a few up to about 100–150 per shipment)
are taken care of by the lines at liner prices, but for trades where the volumes are
increasing up to anything between 200 and 900 units per shipment the charterers
may sometimes employ reefer tonnage, which, with many “tween-­decks” can
provide the deck space required.
The most important trades of fully assembled vehicles are from Japan and
South Korea to the USA and Europe and vice versa, from Europe to the USA,
whilst there is also an inter-­European trade covering important volumes. Secondary trades in respect of volumes carried are from Europe and the United States to
countries in the Middle East, Africa, Central and South America, as well as from
Japan to the same areas, plus Australia. China is also starting to play an important
role more as an importer and less as an exporter of new cars.
The car carrier market is very closed and specialised. It is characterised by:
• A small number of owners, operators, shipbrokers and charterers.
• There were almost 780 car carriers employed on a worldwide basis in
2015.38 It is a closed market using very little broker assistance, where
business is concluded mostly on the basis of long-­term chartering contracts between a few ship operators and the exporting companies (car
manufacturers). The vessels are often built against time charters of
10–15 years. The orderbook shows a preference for larger ships, the
majority being of 6,000 CEUs or more.39
• Except typical time charters, contracts of affreightment (CoA) are also
used as a common charter form in this market (see chapter 13).
• High sensitivity/­volatility of freight rates and vessels’ values to economic cycles.
• No seasonality, as the market follows its own patterns, depending on
changes of World GDP, consumption and growth rates in major economies etc.
• Vessels are not easily liquidated. The second-­hand market is practically
“shallow”.
• High barriers to entry.
38 Clarksons Research, Shipping Intelligence Network (accessed 26 July 2015).
39 Clarksons Research, Shipping Intelligence Network (accessed 26 July 2015).
40
Charter market
1.3.12 Small vessels
There is a large number of vessels of 10,000 dwt and less. Dry cargoes may be
carried by small pure bulkers or multi-­purpose or general cargo vessels possibly
having also a small container capacity. Specialised liquid cargoes are carried by
small tankers correspondingly. Such liquid cargoes may be water, wine, edible
oils, asphalt and bitumen, waste and slops, palm oil, sulphur etc.
Most of this tonnage is engaged in short-­sea and coastal trading. Sometimes,
coastal shipping may be reserved particularly for vessels of the coastal state
(“cabotage trade”). The charter markets of small vessels have their own information systems and channels of communication which function independently
(e.g. the market of small bulkers differs to that of small tankers), whilst their
freight market variations and freight rate fluctuations do not necessarily coincide
with those of the respective ocean-­going tonnage (e.g. the freight rate trends of
small tankers may differ from those of ocean-­going tankers).
In dry cargo markets, many shipping companies carry on independent trading
with smaller-­sized vessels, but the trend is now to employ small single-­deckers
or tween-­deckers in some sort of regularly scheduled feeder traffic. The result is
that these vessels find themselves in competition with other carriers in the short-­
sea trades, including larger ships carrying part-­cargoes, as well as road and rail
traffic.
One may find typical feeder vessels (small containerships or multi-­purpose
vessels) looking for employment in the open market depending on the casual
need. It is, however, also common for ocean liner companies or forwarding
agents or charterers who trade with their own products to operate feeder ships as
a part of their transport scheme.
Owners and operators of coasters and feeder vessels frequently work together,
pooling their fleets and administrative resources in order to undertake chartering
contracts and to optimise vessels’ scheduling, employment earnings and costs.
Some owners specialise in tailoring their ships and operation for so-­called
industrial shipping, in close co-­operation over a longer period of time with a
big exporter/­importer or industry to provide an integrated link in the industry’s
overall logistics system.
1.3.13 Specialised vessels
In addition to the above-­mentioned types of vessels, some of which regarded as
specialised ones forming separate markets on their own (e.g. offshore vessels,
gas carriers, car carriers etc.), there are a number of extremely specialised ships
which serve special transport needs. Among such vessels, the following types are
worth mentioning:
• Heavy-­lift carriers
Some companies have specialised in heavy-­lift cargoes and technically complicated transports, where the movements between quay and ship are the most
41
Charter market
difficult parts of the operation. For such purposes vessels must be built with
heavy lifting gear. Special demands on stability and constructional strength are
required, particularly with regard to vessels’ gear.
• Barges and pontoons
This is a transport system also used for the carriage of heavy material, for example a ready-­built drilling rig, but they are further used as floating quays, as feeders in short-­sea traffic and as discharging platforms between an ocean-­going ship
and the quay. The tug-­barge system requires a combination of logistics, where a
detachable pushing tug unit is used as an engine for a number of “cargo-­hold”
units. The most known such systems are called “LASH ” and “Seabee”.
• Tugs
The demand for towing vessels has grown with their increased use by the offshore industry (see section 1.3.4). Apart from this, towing work for the merchant
fleet has been relatively stable worldwide, as tugs are regularly used not only
for assisting vessels in arriving at and departing from ports of call, but also for
salvage purposes.
42
CHAPTER 2
Charter rates and state of the freight market
Freight is considered to be the most crucial part of a charter agreement. This
chapter completes the charter market analysis, focusing on the freight rates perspective. Firstly, it shows how the general state of freight rates is determined in
the open market. This is compared with liner pricing aspects for which a short
reference is made. Then, factors affecting the fixture rate of an individual charter
are discussed. Analysis goes further to examine the fundamentals of the four
major freight markets; dry bulk, tanker, gas and containerships. In order to show
an overall view of the charter market, for each market segment some interesting
chartering topics are considered, such as the preferred types of vessel fixtures, the
indicative voyage/­trade routes, the major cargo exporting and importing areas,
the typical cargo shiploads, the expression and reporting of spot and time charter
rates, the key indicators of ships’ demand and supply, together with examples of
real charter fixtures (spot and time charter). The state of each freight market is
discussed and the long-­term historical evolution of time charter rates is illustrated for all the representative types of vessels, ranging from 1980 up to 2015.
In the last section of this chapter, freight indices are described to show how the
state of the market is measured and expressed, while freight derivatives are introduced to present how the freight market risk may be managed. Finally, it is worth
noting that freight markets are dynamic, thus an updated market data coverage
is beyond the scope of this book. Therefore, freight rates have been intentionally
omitted from the respective tables.
2.1 Freight market mechanism
In all sectors of the open chartering market, the price for a sea transport, namely
the freight, is determined on the basis of the negotiating power of the involved
parties (the shipowner and the charterer), at a specific time, under the prevailing
charter (freight) market conditions and in accordance with the special requirements of the charter. The fixture rate of a specific charter is typically ranging
close to the current general state of the market for respective vessels and types
of charter. The general state of the freight market is determined from the interchange of demand and supply for sea transport services at a specific point of time.
A huge variety of factors, predictable or not, may possibly affect the demand or
supply of global sea transport and consequently the level of freight rates. Besides,
as the demand for sea transport is derived from the demand for the goods carried, it may be said that the freight levels are effectively formed by the business
43
Charter rates and state of the freight market
balance and the bargaining power between buyers and sellers in the competitive
field of international trade.1
There is a considerable difference between the liner freight market and the
open freight market. The latter is the market where tonnage is principally fixed
voyage by voyage, the so-­called spot market, where the buyers of sea transport
find the tonnage (vessels) required to carry the available cargoes. The open market also includes the time charter segment and an important part covering other
more long-­term contractual engagements of various natures (e.g. bareboat, CoA
etc.). Freight rates are determined through a chartering negotiation process,
made among the shipowners, charterers and their brokers (see chapter 8). On
the other hand, the liner freight market is formed in accordance with freight contracts made between liner operators and shippers, typically on a regular basis
(e.g. annually). Liner pricing is based on complicated pricing schemes where
cargoes are classified in group or classes and each group is priced in accordance
with pre-­determined tables.
Α great percentage of the world volume of goods transported by sea is fixed in
the open market. The balance is taken care of by the liner services in their strictly
directed and scheduled traffic with controlled freight terms and conditions. The
total volume of open market fixtures is mostly dispersed between spot fixtures
and time charters. The spot market increases its percentage share of chartered
ships during periods of general economic recession, when there is a low demand
for sea transport.
The open market is influenced by the “laws” of ships’ supply and demand, but
it would be an over-­simplification to state that the freight market is generated
and directed only by this. The fluctuations in freight levels are very large and
intense, particularly for tankers and bulkers. This will be commented below in
the specific market analysis (see section 2.4 and Tables 2.12, 2.13). Dry bulk and
tanker markets are the two most important freight markets. In the long r­ un their
freight rate fluctuations tend to coincide – but not always – with world industrial
output, whilst in the short r­ un there are seasonal variations, not only arising from
the shipping market fundamentals, but also from major exogenous geo-­political,
social and other factors (e.g. wars, embargoes, natural disasters, strikes, etc. of a
global or local nature). The connection of freight rates to world industrial activity
is greatly reflected by the two so-­called “leading” dry bulk commodities, namely
iron ore and coal (raw materials for the steel industry), whereas seasonal variations are clearly depicted by the demand for ships to carry grain (including soya
beans and rice), which is the third leading commodity in the dry bulk cargo sector
and certainly affected by the “crop season” on a global or local level.
A part of the total available cargoes and ships of the world freight markets
is negotiated, more or less secretly, between the owners and charterers, finally
being fixed for time charters and other long-­term period contracts. What remains
is a number of cargoes looking for ships and a number of ships looking for
1 McConville, J. (1999) Economics of Maritime Transport – Theory and Practice (London,
Witherby and Co. Ltd., 1st edition, pp. 9, 11).
44
C harter rates and state of the freight market
employment. This constitutes the so-­called spot market which develops and
changes on a day-­by-­day basis; the spot market affects any geographical area and
covers the whole spectrum of types, sizes and features of ships. It is this market
situation, the fixing and the terms obtained in the spot market of shipping sectors,
that are being reported continuously by brokers and shipping publications. The
spot market still reacts quickly to various exogenous factors (e.g. war or armed
conflict). However, today, when information is readily available to all parties,
there tend to be fewer surprises and the volatility in the freight markets, even
remaining high, has been reduced compared to the past.
An illustration in Figure 2.1 shows how operative forces work in practice in a
miniature spot market. If, for a specific loading date within a limited geographical area, there are 10 ships open for employment, but there are only nine cargoes
offered, then it is likely that none of the vessels will obtain a higher freight rate than
the lowest rate that anyone of the respective shipowners is willing to accept. In the
reverse situation, where there are 10 cargoes available but only nine ships, one can
expect every ship that is fixed to obtain better terms than the preceding one.
Various factors may influence the general freight conditions, the ship costs and
the development of the open market, such as the general state of the world economy, sudden changes in demand for specific commodities, an economic boom
within special market areas, a state of war, a closure of important routes, a crop
failure, an extreme congestion in important ports, an oversupply of specific types
of ships, or an unusually late or early closure of ice-­bound waters etc.
Figure 2.1 The Spot Market
45
Charter rates and state of the freight market
It is practically impossible to predict with any degree of certainty future developments in the freight market. In general, periods of low freight market conditions are substantially longer than periods when high freight rates can be obtained.
There is really no such thing as a “normal” market level and it would be more
accurate to say that the freight market constantly oscillates between extremes.
There are always, even during periods of general economic recession, market
areas where there may exist a more or less temporarily high demand for tonnage.
In 1977, for instance, dry bulk and tanker freight rates were weak as there was a
great excess of tonnage in both markets, caused by continuing deliveries of vessels from the shipyards. At the same time, however, there was a strong demand
for ocean-­going ro/­ro vessels and reefer ships, which thus obtained very high
time charter rates. More recently, a similar market divergence was observed in
2014–2016. Dry bulk spot rates remained depressed, greatly influenced by the
reduced growth rate of China and an oversupply of vessels, whereas on the contrary, tanker spot market was extremely strong, positively affected by the low oil
price environment and a low orderbook of new vessels.
Other factors which contribute to the uncertainty in forecasting and always
have a decisive influence on the freight market development, are changes in
economic conditions in critical countries and geographical areas, such as China,
the USA, Europe, Japan, Russia, Brazil, India, Middle East, Latin America and
Australia. A farmers’ strike in Argentina creating a massive congestion in the
Argentinean ports certainly has an influence in the dry bulk freight rates, as does
flooding which affects the production in Australian coal mines. Another remarkable example concerns the United Nations’ embargoes that may be imposed against
various countries for various reasons (e.g. Libya, Iran, Iraq), having rather a sudden impact on the tanker freight markets. Information about such matters tends
to hit the shipping market suddenly, although not quite unexpectedly. The most
remarkable example in this century is the absolute collapse of the international
trade and thus of all freight markets, which occurred after the outbreak of the
“Global Financial Crisis” in the last financial quarter of 2008.
During a general low freight market period, every sign is noted which may
indicate a change toward an increase in demand for sea transport, such as the
state of the world economy and its key drivers, or the development of the geopolitical situation or the market trends within special sectors (e.g. steel output,
production of cars, outcome of harvest, developments in important consuming
areas etc.). When there seem to be small but firm indications of higher freight
rates shown simultaneously by most important market indicators, the charterers
and shippers will try to belittle such signs of forthcoming changes, while shipowners then adopt a “wait and see” approach. If it becomes evident that there is
substance in these market trends, charterers become more and more active in the
time charter markets, trying to secure long-­term charter contracts at low freight
levels. Thereby, the supply of tonnage on the spot market will decrease and the
freight levels generally start to rise, albeit slowly.
If there arises a sudden increase in demand for tonnage in a special trade, as
for instance the iron ore trade between Australia and China, a scarcity of tonnage
46
C harter rates and state of the freight market
may occur in other areas and in other trades dependent on the same type and size
of ship, for example in the iron ore trade between Brazil and China (as Australia
and Brazil are competing major iron ore exporters). The rising trend in freight
levels will then become further accentuated. At this point, certain psychological
factors will start to contribute to the development of the market. Charterers and
shippers, in fear of running into a situation of acute scarcity of tonnage, will try
to conclude their shipping arrangements as soon as possible. Shipowners can ask
for increasingly higher freight rates and if, for example, a sudden political crisis
arises, then those interested in the shipping market may find themselves in a real
freight boom. The trading in Forward Freight Agreements (FFAs) will no doubt
have an impact on owners’ expectations of the market. Before fixing away the
ship for a period employment, an owner will carefully study the FFA figures for
the time span in question (see section 2.5).
A frequent consequence of such a development is that the owners of older vessels, which may have been laid up during the low market period, will start trading
their ships again instead of sending them to the scrapyards. The shipowners will
now start to offer part of the previously time-­chartered tonnage for employment
on the rising spot market.
Another factor which will affect the market with a delay of some two or three
years is that a number of owners are now ordering new-­builds, which, if they
have bad luck, will be delivered during the next period of a low freight market.
Due to heavy ordering of new ships, a recession in the shipping market may
now be “en route”, although its precise timing cannot be predicted exactly. Shipowners will show an increasing interest in fixing their ships for long-­term charter contracts and freight levels will gradually move downwards, as new vessels
are gradually entering the market. Charterers will hold out to obtain even lower
freight levels and, as suddenly as the freight rates started to rise to very high
levels, the market will drop.
The effects of the above-­described cycle were highlighted in 2008. The period
2003–2008 was by far the most profitable six-year period in the entire history
of shipping. Freight rates increased unthinkably in all major freight markets,
namely dry bulk, tanker and containerships. As a result, a huge amount of new-­
builds were ordered. However, during the “Global Financial Crisis” which broke
out in autumn 2008, the shipping market came to a total standstill and the freight
rates dropped drastically. At the same time the new-­builds that had been previously ordered had been planned for delivery in 2009 and onwards, putting further
pressure on a freight market already in distress.
The year 2008 formed a milestone for shipowners, since it marked the end
of the most profitable period ever, as well as the start of a sore and protracted
shipping recession (or even depression) for most of the vessel types and for so
many years. That year fully demonstrated the unpredictability of the market, due
to the unprecedented volatility of freight rates. After the unique culmination of
the freight markets in May 2008 and the best summer ever, the bankruptcy of the
investment bank Lehman Brothers on 16 September 2008 marked the reversal of
the flow of things for all global markets. Looking at the dry bulk market, at the
47
Charter rates and state of the freight market
beginning of the year, a capesize earned in the spot market $130,000/­day, whilst
in February the freight had decreased by 40%. Then, the need to stockbuild ore
reserves and some port congestion incidents fired the spot rates to $320,000/­day
in June. In early September the spot earnings dropped to $80,000/­day, however,
as the financial crisis was intensified, still mills stocks accumulated and trade
collapsed, the capesize spot earnings tumbled to $6,000/­day in October and just
$2,000/­day in November. Although the 2008 average annual profitability of dry
cargo vessels closed slightly below the all-­time high recorded in 2007, the year
ended in an absolutely devastating manner. For the tanker market, things were
equally unpredictable and highly volatile. A VLCC who earned in the spot market
$195,000/­day in early January, earned only $50,000/­day at the end of the same
month. Although the demand for crude and petroleum products remained sluggish, the market defied the fundamentals, resulting in VLCCs earning $170,000/­
day in July, due to the need for stockbuilding and the marginalisation of single
hull tankers from the market. In general, the average annual tanker spot rates
increased by 30% compared with 2007.2
2.2 Liner pricing aspects
Although from the perspective of shipbroking and chartering practice focus
should be given on the open market freight determination mechanism, before
proceeding further, and for the sake of completeness, a few liner pricing issues
will be examined at this point.
As a result of containerisation, in liner trade routes the freight of carrying a
container may be composed of the following five parts3:
1. Inland haulage outbound from shipper to terminal, i.e. from the point
where the shipper delivers the cargo to the carrier (shipping line) up to
the loading terminal.
2. Terminal charge at port of loading.
3. Ocean freight for sea transport.
4. Terminal charge at port of discharge.
5. Inland haulage inbound from terminal to consignee (recipient), i.e. from
the discharging terminal up to the point where the cargo is delivered to
the consignee.
Although freight of inland haulage and terminal charges are calculated on a container basis, ocean freight is a function of the cargo carried inside the container. As
a consequence of the numerous cargoes carried by the liner vessels, each liner company has established its own complicated pricing system of sea transport services.
In accordance with that, each cargo is classified in a group or class of commodities
2 Clarksons Research Shipping Intelligence Weekly (9 January 2009).
3 Cambridge Academy of Transport (2000) Anatomy of Shipping (seminar proceedings, 10–22
September 2000, sessions 31 & 32, pp. 19–20).
48
C harter rates and state of the freight market
on the basis of its particular properties and characteristics. Each group of commodities is priced in accordance with a pre-­determined pricing scheme.
There are a number of factors influencing the freight determination in liner
shipping; however two of them are critical: the unit value of commodity and
the cargo stowage factor. Even though pricing mechanisms have been simplified
by far due to the extensive use of advanced IT systems, the rationale remains
unchanged; different types of cargoes are carried on different freight rates even
if almost all liner cargoes are carried in containers today. On the other hand, cargoes may be carried on “Freight All Kinds” (FAK ) terms, when various kinds of
goods are pooled and shipped together at one single freight rate which is irrespective of each individual commodity. Ocean freight is typically surcharged with
the so-­called “Currency Adjustment Factors” (CAF ) and “Bunker Adjustment
Factors” (BAF ), where it is agreed that the freight is adjusted in accordance with
the currency exchange fluctuations and the bunkers prices respectively.
In the past, liner conferences used to offer better prices in major shippers,
either by the so-­called “deferred rebate schemes” where the shippers should
prove that they used only the liner services of the specific conference members
to receive a special rebate, or by the “exclusive contract” or “dual rate schemes”,
where shippers should co-­operate on an exclusive basis with the liner conference
in exchange for receiving better freight rates.4 Loyal customers may still enjoy
better pricing from liner companies today, even though liner conferences have
vanished and methods of preferential treatment or market control are nowadays
prohibited by most countries. Nevertheless, liner companies have adopted other
modern methods of co-­operation and market consolidation, such as shipping alliances or merger and acquisition techniques. After a period of significant mergers
and acquisitions starting at the end of the 1990s, now all major liner companies
have been consolidated to operate under only a few major shipping alliances in
main trades, which are allowed to co-­operate mostly on terms of vessels’ scheduling, slots’ interchange etc., but not on controlling freight rates (see section 1.1.3).
When pricing their services, liner companies face fierce competition and considerable restrictions, the most important of them coming from shippers’ strategic
decisions, the elimination of the role of conferences and other monopolistic practices of the liner companies due to global anti-­trust rules, the over-­supply of the
liner market from the shipbuilding of huge containerships, the competition from
air transport and bulk shipping, or even from problems of co-­operation arising
from inside a shipping alliance.5
In general, since early 2000s freight rate determination in liner shipping has
been converted from “tariff-­based” to “contract-­based” and the reform of
4 Sjostrom, W. “Liner Shipping: Modelling Competition and Collusion” in Grammenos, C.T.
(2002) The Handbook of Maritime Economics and Business (London, LLP, 1st edition, p. 318);
McConville, J. (1999) Economics of Maritime Transport – Theory and Practice (London, Witherby
and Co. Ltd., 1st edition, pp. 348–349).
5 Heaver, T. “Supply Chain and Logistics Management: Implications for Liner Shipping” in
Grammenos, C.T. (2002) The Handbook of Maritime Economics and Business (London, LLP, 1st
edition, p. 380).
49
Charter rates and state of the freight market
institutional business framework in the USA and Europe has been the major influencing factor to this. Liner market has eliminated price enforcement methods
or practices of oligopolistic control, encouraging carriers and shippers to freely
and individually negotiate and agree on contract of carriage terms, in accordance to their commercial needs. Therefore, even if each liner operator may have
retained its own “tariff ” which determines the groups of cargo pricing classification in accordance with the cargoes’ particulars, the freight rates are not imposed
monopolistically, but formed as a result of the negotiating power of the involved
parties; carriers and shippers. Final prices offered from carriers to shippers come
after the evaluation of the transport services required, the types of containers
and the cargoes carried (e.g. reefer containers are priced higher) and the current
balance between the ships’ supply and demand in the market. Liner companies’
offers usually apply for a specific period (e.g. up to one year), so shippers are able
to control the transport costs and plan their transport needs. Under such circumstances, the negotiating position of the shippers seems to have been strengthened
in comparison to the past.
Liner freight rates are not subject to as much volatility as freight rates in the
open market. Freight changes are slow and fluctuations are smoother in the liner
market. It goes without saying that liner shipping is clearly a market of less interest as far as chartering and shipbroking are concerned. Therefore, liner pricing
will not be commented on further in this text. Instead, analysis will revert to
principles followed on the open market, discussing the determinants of a fixture
in the following section, before proceeding to a freight market presentation in
section 2.4.
2.3 Determinants of the fixture rate in the open chartering market
Freight or hire rate is the most crucial subject of chartering negotiations. The
fixture rate of an individual charter is negotiated through brokers’ channels in the
open market and may be influenced or determined by the following important
factors:
1. Τhe type of vessel sought to be fixed. As a general rule, freight rates of
the most common vessel types (e.g. tankers, bulkers) present higher volatility and sharper fluctuations than more specialised types of vessels.
This is a crucial factor in all types of charter (spot and period).
2. Ship’s specification and condition. Vessel particulars, such as the cargocarrying capacity, speed, draught, beam, age, fuel efficiency (e.g. eco-­
ships), class, cargo gear etc. affect the chartering opportunities and the
freight rates achieved. This is also affected by the status of ship’s maintenance. A charterer’s opinion for the future performance of the ship
is much influenced by such parameters. This is a crucial factor in all
charter types (spot and period).
3. The geographical location of vessel. In voyage charters the distance
between the geographical position of the ship and the cargo to be carried
50
C harter rates and state of the freight market
4.
5.
6.
7.
8.
9.
may seriously affect the freight rate of a fixture. In period charters the
geographical position of the vessel in relation to the agreed delivery
place to the charterer may also play a role in calculating the charter hire.
Charter period. Spot freight rates are more volatile compared to time
charter rates, due to the shorter time of vessel’s employment in the first
case. Spot rates reflect the daily fluctuations of the freight market, whilst
time charter rates reflect the long-­term trend of the freight market.
The overall cost of providing the vessel. Cost allocation between the
involved parties is of utmost importance when selecting a type of charter and fixing a chartering rate. For example, in a voyage charter the
ship’s voyage costs, operating expenses, capital costs and possibly the
cargo-handling expenses are all for the shipowner’s account, in a time
charter the voyage and cargo-handling costs are passed to the charterer,
whereas in a bareboat charter only the ship’s capital costs are owner’s
responsibility.
Market anticipation. Market forecast and expectations of the negotiating parties in respect of the future freight rates are critical. This is
important in all aspects of decision-­making in shipping, thus it affects
considerably all types of charter (spot and period).
Current state of the market. It is one of the most important factors when
fixing the freight rate for a specific charter. Market reports, shipping
publications and freight indices are valuable tools for all chartering and
shipbroking practitioners, in order to form their view for the state of the
freight market and adjust their policy accordingly.
Customer satisfaction and retention. Modern marketing principles (see
chapter 5) require from the shipowners to form their chartering strategy
in accordance to their customers’ (charterers’/­shippers’) needs. This is
more important today than in the past within the shipping industry. It
may be a critical factor when considering the determination of freight
rates. It applies in all types of a ship’s charter, whilst it is also important
for liner shipping.
Bargaining (negotiation) power of the parties. Determination of a fixture rate is a matter of chartering negotiation between a shipowner and
a charterer. This balance is affected by various parameters, such as
financial standing of the parties, timing, long-­term relationships and the
needs or priorities of the parties, etc.
2.4 Freight market analysis and state of the market
This section attempts to chart the most important freight markets and comprehensively describe the fundamental parameters which determine the state of
the freight rates. Each of the following sections presents the types of preferable
vessel fixtures, benchmark voyage routes, major ports of loading and discharging, examples of how spot freight rates and time charter rates are measured and
expressed in the market, as well as the key indicators in respect of ships’ demand
51
Charter rates and state of the freight market
and supply. This methodology is followed for each of the four crucial freight
markets of the shipping industry: dry bulk, tankers, gas carriers and containerships. Tables and figures are provided to familiarise the reader with types of
vessels’ employment, important cargoes, shipload quantities and trade routes, as
well as with the way that freight rates are expressed. As the market is dynamic,
numbers are constantly changing, thus there is no point for this section to focus
on freight rates of the markets. The market practitioner should always consult
expertised maritime research companies, shipbrokers and shipping publications
in order to get a fully and constantly updated view of the freight markets. However, the reader may refer to Tables 2.12 and 2.13 at the end of this section, to find
a historical evolution of the yearly average time charter rates of all major ship
types, ranging from 1980 up to 2015, as kindly provided by Drewry Maritime
Research on an exclusive basis for this edition.
2.4.1 Dry bulk market
A large variety of cargoes are carried on bulk carriers but, as a rule, the larger
the vessel the bigger the shiploads are and the fewer commodities are commonly
loaded. For example, capesize ships carry mostly iron ore and coal in large shiploads. Panamax sizes are commonly employed on coal and grain trades but also for
the carriage of fertilisers, sulphur, salt, bauxite, alumina and steel slabs. The smaller
handysize to supramax sizes, in addition to the above, are also often employed in
carrying smaller quantities of cargoes such as steel products, scrap and sugar.
In all dry bulk markets, spot charters concern vessel fixtures made on a voyage
basis and thus freight rates are typically expressed or reported in US Dollars per
tonne of cargo carried, as well as on a time charter equivalent basis6 (average earnings in US Dollars per day) which enables a comparison with time charter employment alternatives. On the other hand, time charter hire rates are always expressed
and reported in US Dollars per day. The most prominent shipping reviews may
report average hire rates for different vessel types and sizes (e.g. capesize, panamax, supramax/­handymax, handysize) and for a variety of charter durations
(e.g. six-month, one-year, three-year, five-year time charters) and vessels’ age
(e.g. modern vessels of five years old, or elder ones of 10 or 15 years old).
An analytical presentation of the main dry bulk markets is set out below.
2.4.1.1 Capesize market
Capesize vessels (> 100,000 dwt) are mostly employed in spot charters, i.e. being
fixed on a voyage-­by-­voyage basis, but also period charters are not uncommon.
Table 2.1 presents indicative trade routes for spot (voyage) employment of capesize vessels, the typical cargoes carried and some of the major ports of loading
and discharging. As the market is dynamic, emphasis is given on these factors,
not on the respective charter rates which are constantly changing. It may be seen
that these vessels typically carry iron ore and coal.
6 See section 14.1.2.5 for Time Charter Equivalent (TCE).
52
C harter rates and state of the freight market
Table 2.1 Capesize Bulk Carriers Indicative Spot Trades
Cargo Shipment (tons)
100–150,000
160,000
160–170,000
160–170,000
120–160,000
160,000
150,000
160,000
150,000
150,000
150,000
Single Voyage
Iron Ore
Iron Ore
Iron Ore
Iron Ore
Iron Ore
Iron Ore
Coal
Coal
Coal
Coal
Coal
Tubarao (Brazil) – Japan
Brazil – ARA (Antwerp/Rotterdam/Amsterdam)
Tubarao (Brazil) – Qingdao (China)
Dampier (Australia) – Qingdao (China)
W. Australia – ARA
Saldanha Bay (South Africa) – China
Richards Bay (South Africa) – ARA
Richards Bay (South Africa) – China
E. Australia – South Korea
Hay Point (Eastern Australia) – Japan
Puerto Bolivar (Colombia) – ARA
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 14) and Baltic Exchange
Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, p. 34),
data compiled by A. Papadopoulos.
The most interesting iron ore trade concerns China imports either from Brazil
or Australia in quantities of about 175,000 mt. Major iron ore trades may be
summarised as follows7:
•
•
•
•
•
•
•
Australia to Far East and Europe
India to Far East
South Africa to Far East and Europe
Brazil to Far East, Europe and Argentina
Chile to Far East
Norway to Europe
Black Sea to Far East
Coal is mostly exported from South Africa, Colombia or Australia to Europe,
China etc. in quantities of about 168,000 tonnes. Major coal trades may be summarised as follows8 (this concerns all coal trades, thus includes also smaller coal
shipments that may be carried by panamax, supramax and handymax vessels):
• Australia to Far East and Europe, with some cargoes also to Brazil and
Argentina
• Australia to India and South Africa to India
• Indonesia to Far East and Europe
• South Africa to Far East and Europe
• Colombia to Europe
• USA (East Coast) to Far East and Europe
• Canada (West Coast) to Far East
7 The Baltic Exchange (2014) The Baltic Code 2014 (p. 11).
8 The Baltic Exchange (2014) The Baltic Code 2014 (p. 11).
53
Charter rates and state of the freight market
An example of a spot (voyage) charter concerns a fixture made in mid-­July 2015
about a capesize vessel (177,000 dwt, built 2010) owned by a respectable Hong
Kong based shipowner which chartered his vessel to a first-­class charterer, for
a cargo voyage from Tubarao (Brazil) to Qingdao (China), in order to transport
170,000 mt of iron ore, at USD 13.5/mt of cargo carried, with lay/­can9 dates on
10/18 August 2015.
An example of a time charter fixture was reported as made in mid-­July 2015,
concerning a capesize vessel (181,000 dwt, built 2014) owned by a respectable
Greek-based shipowner which chartered his vessel to a first-­class charterer, for a
short period of 4–7 months, in order to trade it worldwide, for $14,750/­day, with
lay/­can dates on 25/30 July 2015 and agreed delivery place in China, redelivery
worldwide.
2.4.1.2 Panamax market
Panamax vessels (65–100,000 dwt) are mostly employed in spot charters, but also
period charters are found. Table 2.2 presents indicative types of spot (voyage)
employment for panamaxes, the typical cargoes carried and some major ports
of loading and discharging. It is shown that these vessels usually carry coal and
grain. Coal that is loaded in panamaxes is mostly exported from Australia, South
Africa, the USA, Colombia, Russia, Indonesia and imported mostly in Europe,
China, Japan and India in quantities of about 65–74,000 mt. Some major coal
trades were also mentioned before (see Capesize market, section 2.4.1.1). Grain
quantities for panamaxes are loaded in the North Pacific area and the USA to
China, Japan and Europe in quantities of about 55–60,000 mt. For example,
major wheat trades may be summarised as follows (this concerns all trades, thus
includes also smaller shipments that may be carried by supramax, handymax
and handysize vessels)10:
• North America to Far East, Middle East and Europe
• Australia to Far East and Middle East
• East Coast of South America to Far East and Europe with some cargoes
also to Middle East
• UK/Continent to Middle East and North Africa
• Black Sea to Middle East
Another typical grain cargo is soya beans. Its major trades may be summarised
as follows (this concerns all trades, thus includes also smaller shipments that may
be carried by supramax, handymax and handysize vessels):
• USA (Gulf/Mississippi) to Far East, Middle East and Europe
• Brazil to Far East and Europe
• Argentina to Far East and Europe
9 Lay/Can term here determines the agreed period within which the loading process must start.
10 The Baltic Exchange (2014) The Baltic Code 2014 (p. 11).
54
C harter rates and state of the freight market
Table 2.2 Panamax Bulk Carriers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
70,000
70,000
74,000
55,000
55,000
Eastern Australia – Japan
Richards Bay (South Africa) – Mediterranean Sea
Newcastle (Australia) – Qingdao (China)
US Gulf – Japan
US Gulf – ARA
Coal
Coal
Coal
Grain
Grain
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 15), data compiled by
A. Papadopoulos.
Table 2.3 Handymax/Supramax Bulk Carriers Indicative Time Charter Trips
Vessel Size (dwt)
Trip Charter/Trading Area
40–60,000
40–60,000
40–60,000
40–60,000
40–60,000
Transpacific trip
FE (Far East) – Australia
Continent (Western mainland Europe excl. UK) – FE (Far East)
FE (Far East) – Continent
US Gulf – Continent
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 16), data compiled by A.
Papadopoulos.
An example of a spot (voyage) charter concerns a fixture made in June 2015
about an older panamax vessel (70,000 dwt, built 1997) which was chartered to
carry a cargo of 53,000 mt of grain from US Gulf to China, for a high rate of
$31.75/mt of cargo carried, with lay/­can dates on 10/15 July 2015.
An example of a time charter fixture was reported as made in July 2015, concerning a panamax vessel (73,000 dwt, built 2006) owned by a respectable Greekbased shipowner which chartered his vessel to a first-­class charterer, for a period of
11–14 months, in order to trade it worldwide, for $7,000/­day, with lay/­can dates on
12/20 July 2015 and agreed delivery place in China, redelivery worldwide.
2.4.1.3 Handymax and supramax / ultramax market
Handymax and supramax/­ultramax vessels (40–65,000 dwt) are usually employed
in spot charters and time charter trips. Table 2.3 presents indicative types of trip
time charters for handymax and supramax/­ultramax bulkers, as well as some
major trading areas. This does not downgrade at all the importance of the spot
market for this sector. These vessels usually carry coal and grain in similar (spot)
trade routes but in smaller quantities than panamax vessels. The most important
coal and grain trades worldwide were mentioned above (see 2.4.1.2, 2.4.1.1).
An example of a voyage charter concerns a fixture made in July 2015 for a
modern Ultramax vessel (63,000 dwt, built 2013) which was fixed to carry a
cargo of 54,000 mt HSS grain (HSS: heavy grain, soya, sorghums) from Texas
55
Charter rates and state of the freight market
Gulf (USA) to Northern China, at $37/mt of cargo carried, with lay/­can dates on
25 July/5 August 2015.
It must be mentioned here that supramax/­ultramax vessels are commonly
chartered on a time charter trip (TCT) basis, which is a hybrid form of charter
where the owner commits his vessel for such a time period as it lasts for a
specific voyage to be executed. In such a charter the owner is paid in US Dollars per day, not in US Dollars per ton of cargo carried. An example of a time
charter trip fixture was reported as made in July 2015, concerning a modern
supramax vessel (56,000 dwt, built 2014) which was agreed to be delivered to
the charterers in Rio Grande (Brazil) to load in the ECSA (East Coast South
America) area, so as to execute a cargo voyage and discharge in the Singapore–
Japan area where it should be redelivered to the owners. The charter hire was
for $13,000/­day and a ballast bonus of $300,000 was agreed, i.e. an extra
amount paid to the owner as compensation for moving his vessel in ballast to
the delivery area.
2.4.1.4 Handysize market
Handysize bulkers (10–40,000 dwt) typically trade on a spot basis, as well as
in time charter trips. Table 2.4 presents indicative types of trip time charters for
handysize bulkers and some major trading areas. These vessels are trading worldwide, able to carry a great variety of cargoes, so only some representative time
charter trips are shown instead of typical spot trades. This does not downgrade at
all the importance of the spot market for this sector.
It must be stressed that time charter trips are fixed, paid and reported in US
Dollars per day, even though they concern specific cargo voyages.
An example of a voyage charter concerns a fixture made in July 2015 for a
modern handysize vessel (33,000 dwt, built 2014) which was fixed to carry a
cargo of 25,000 mt sugar from Maputo (Mozambique) to Rotterdam (Netherlands), for $25/mt of cargo carried, with lay/­can dates on 21–25 July 2015.
Another example of a time charter trip fixture was reported as made in
July 2015, concerning an older handysize vessel (30,000 dwt, built 1999) which
was agreed to be delivered to the charterers in Bejaia (Algeria) to load in the
Black Sea area, so as to execute a cargo voyage and discharge in the Mediterranean Sea area where it should be redelivered to the owners. The charter hire rate
was agreed for $8,000/­day.
Table 2.4 Handysize Bulk Carriers Indicative Time Charter Trips
Vessel Size (dwt)
Trip Charter/Trading Area
10–40,000
Continent (Western mainland Europe excl. UK) – Transatlantic rv
(round voyage)
FE (Far East)/Australia rv (round voyage)
10–40,000
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 17), data compiled by A.
Papadopoulos.
56
C harter rates and state of the freight market
2.4.1.5 Dry bulk market: demand factors
The demand for bulk carriers is crucially affected by numerous, constantly
­changing, global factors. At this point, only the most important key drivers for the
dry bulk demand will be addressed below (the list is indicative, not exhaustive):
• The most significant driver of dry bulk demand is China, more precisely Chinese policy in respect of overall industrial activity, steel production, iron ore production and imports, metallurgical (coking) and
steam (thermal) coal demand, grain imports and efforts to combat pollution. Together with that, China’s selection of its basic iron ore supplier
between the traditional rivals, Brazil and Australia, is always crucial.
• GDP growth on a global level and particularly in the two key drivers
of the world economy, China and North America, as well as other economic areas such as the European countries of OECD, Japan, India,
other Asian countries, Latin America.
• Global imports of the five major bulks, namely iron ore, metallurgical
and steam coal, grain, phosphates, bauxite/­alumina, as well as imports
of steel products and minor bulks.
• Steel production on a global level, but also particularly in Japan, Western Europe and developing Asia, including India which plays a critical
role (China is excepted as mentioned separately above). In relation to
that, critical factors are also Japanese, European and Asian iron ore and
metallurgical coal imports. The role of India in importing steam coal is
expected to increase in the future.
• In respect of the steel products trades, critical factors are exports from
China, Japan and countries of the former Soviet Union, as well as
imports in the US, Middle East and developing Asia.
• In respect of the grain trade, critical factors are exports from the US, Latin
America and Australia, imports in Japan, other Asian countries (except
China imports which mentioned separately before), Middle East and Africa,
as well as seasonality and weather conditions which affect “crop years”.
• Demand expressed in ton-­mile terms, so as the distance of trades to be
taken into consideration in correlation to the volumes of cargo carried.
Iron ore trade is mostly affected by this. For example, if China imports
a quantity of iron ore from Australia and substitutes this supplier for
Brazil, this would create much more demand in ton-­mile terms for the
same cargo quantity carried.
• Seasonality.
2.4.1.6 Dry bulk market: supply factors
There are some “key indicators” about the supply of dry bulk vessels. These critical factors are listed below (the list is indicative, not exhaustive):
• Fleet annual growth, which is determined by ships’ ordering and deliveries on the one hand and scrapping on the other.
57
Charter rates and state of the freight market
• Fleet structure. In respect of this, the following points may be examined:
◦ Orderbook to existing fleet: This ratio measures the number or tonnage capacity of the vessels that are expected to be built in the next
2–3 years, as a percentage to the existing fleet. A “heavy” orderbook, either in absolute terms or as a percentage to an existing fleet,
denotes that many ships are to enter in the market in the next few
years, increasing the possibility of an “over-­supply” and a drop of
the freight rates if demand does not prove sufficient. As an example,
the orderbook for all dry bulk vessels stood at a moderate 16% of the
whole fleet in January 2016, with the heaviest orderbook among the
sub-­sectors being for the handymax/­supramax segment.11
◦ Age breakdown: This shows the age structure of a fleet. As a general
and widely accepted market perception, the vessels’ useful life is
estimated at approximately 25 years. Thus, vessels of up to 10 years
old are generally considered modern ones and ships over 20 years old
are generally considered scrapping “candidates”. It is obvious however that, in periods of shipping recession, vessels may be scrapped
even at the age of 15 years old, whereas in periods of booming markets vessels of 30 years old or more may keep on trading as owners
defer their decision to scrap them. The fleet age structure indicates if
a fleet is modern or aged. In periods of low rates, the freight markets
may be more easily relieved in cases of aged fleets rather than in
cases of modern fleets, as in the former situation more vessels are
possible to move to the scrapyards. In relation to the above, a ratio
showing which percentage of the fleet is over 15 or 20 years old
shows how aged a fleet is and how many vessels may be scrapped
in the next years. As an example, it may be commented that the bulk
carrier fleet in total was modern enough in January 2016, as only 8%
of the fleet was over 20 years old.12
◦ Replacement ratio: This measures the orderbook (number of ships or
tonnage capacity in dwt) of the vessels to be built, as a percentage to
the existing fleet which is over 15 years old. Essentially, it is a ratio
which combines the above-mentioned aspects (orderbook and age
structure) to show how the older vessels are expected to be replaced
by the newbuildings. As an example, it may be mentioned that in January 2016 the replacement ratio (orderbook to fleet of over 15 years
old) stood at 105% for the total dry bulk fleet, showing a considerable
orderbook in relation to a relatively modern dry bulk fleet.13
• Fleet productivity, technological factors and innovation. The so-­called
“productivity” of the fleet is increased when a fleet’s average speed is
11 Clarksons Research Dry Bulk Trade Outlook (January 2016).
12 Clarksons Research Dry Bulk Trade Outlook (January 2016).
13 Clarksons Research Dry Bulk Trade Outlook (January 2016).
58
C harter rates and state of the freight market
improved. Slow steaming may be preferred in periods of low or flat
freight rates when this is combined with high oil prices and costly bunkers, as this tactic saves costs and keeps the fleet employed for a longer
time period. In such a case vessels’ supply is “technically” decreased
and freight rates are not further deteriorated. Besides, technological factors, such as automation, innovation, cost-­effective fuel management
(e.g. eco-­ships), may crucially affect the ships’ productivity, operation
and chartering ability.
• Fleet utilisation and vessels’ lay-­up. In periods of strong freight markets, the utilisation of vessels is increased, whilst in periods of weak
markets the contrary occurs. When Baltic Dry Index (BDI) recorded
a new all-­time low at 290 points in February 2016, the dry bulk fleet
utilisation rate stood at 82.5%, the lowest level since 1980.14 This
reflected the poor state of the respective freight market in 2015 which
finally collapsed in early 2016, mostly due to a typical “over-­supply”
phenomenon and China’s economic slowdown. In such periods of shipping crisis, lay-­up of vessels gets radically increased as ship operators
are unable to find satisfactory chartering alternatives for their ships.
When vessels’ earnings are far below their operating costs, then the
owners are forced to examine the alternative of lay-­up, by taking into
account the relevant costs compared to the freight market prospects and
the chartering ability of their vessels. This was a growing situation in
2016, when the owners had the choice of the so-­called “warm lay-­up”
(a more temporary option where the vessel is kept at anchorage, fully
functioning and ready for employment with her crew stand-­by) and the
“cold lay-­up” (a more permanent option that may last for months or
even years).
2.4.1.7 State of the dry bulk market
The dry bulk market was at historical lows in 2015 and collapsed in early 2016.
Baltic Dry Index (BDI)15 recorded an all-­time low at 290 points on 11 February 2016, after a protracted recession period which began in the last financial
quarter of 2008. This in turn had followed a booming six-year period of shipowners’
extraordinary profits which lasted from 2003 till 2008, when BDI recorded its
all-­time high at 11,793 points on 20 May 2008. It is remarkable that a modern
capesize vessel could have been chartered for over USD 160,000 per day in a
one-year time charter at the end of 2007 and mid-­2008, whilst a similar vessel
would have fetched only USD 6,250 per day in a one-year time charter and about
USD 3,000 per day on spot employment in March 2016. From the historical
development of freight rates, the long-­term cyclical pattern of the dry bulk market may be obvious, as well as the high volatility of bulk carrier freight rates.
14 Marsoft Dry Bulk Market Report (February 2016, p. 4).
15 BDI is the most representative shipping index measuring the daily state of the dry bulk market.
It is published by the Baltic Exchange of London. See also section 2.5.
59
Charter rates and state of the freight market
Tables 2.12 and 2.13 at the end of this section depict the historical development of the average one-year time charter rates for the most indicative types of
bulk carriers (handysize, handymax, panamax and capesize) ranging from 1980
to 2015, as kindly provided by Drewry Maritime Research.
2.4.2 Tanker market
Tankers are mainly designed to carry all variations of oil cargoes. The larger
vessels are specialised in carrying crude oil, whilst the smaller sizes are focusing
on the products trades. An analytical presentation of tanker sub-­sectors follows,
including a separate section for the chemical tankers. All tanker freight markets
(particularly the crude trades) remained very strong for both spot and time charters from the last financial quarter of 2014 up to the end of 2015 and the first-­half
of 2016. This was mainly caused by the decrease of oil prices and the consequent
stockbuilding of oil reserves by the major economies of the world.
In all tanker markets spot charters concern vessel fixtures made on a voyage
basis. Freight rates are expressed and reported either in Worldscale terms (see chapter 14 and www.worldscale.co.uk), or in US Dollars per ton of cargo carried, or on a
time charter equivalent basis ($ per day) to be able to get compared with time charter
employment alternatives. On the other hand, time charters concern vessel fixtures
made on a period basis and thus hire rates are expressed in US Dollars per day. The
most prominent shipping reviews may report average hire rates for different vessel
types and sizes (e.g. VLCC, suezmax, LR1, MR etc.) and for a variety of charter
durations (e.g. six-month, one-year, three-year, five-year time charters) and vessels’
age (e.g. modern vessels of five years old, or older ones of 10 or 15 years old).
An analytical presentation of the main tanker markets follows.
2.4.2.1 VLCC market
VLCCs (> 200,000 dwt) mostly trade on a spot basis, typically carrying crude
and other dirty oil cargoes, while period charters are not uncommon. Table 2.5
presents indicative types of spot (voyage) employment for VLCCs, typical cargoes and sizes, as well as some major ports/­areas of loading and discharging. It is
clearly seen that these vessels carry crude oil which is loaded in quantities of about
260–280,000 mt and mainly exported from the ports of the Arabian Gulf area and
secondary from the West Africa or the Caribbean Sea. Major importers are Europe,
the USA, Japan, China, South Korea, India and Singapore.
The most important crude oil trades worldwide may be summed up as follows
(this concerns all trades, thus includes also smaller shipments that may be carried
by suezmax, aframax or panamax tankers)16:
• Middle East to Far East, NW Europe, USA, Indian subcontinent, South
Africa, Brazil, Red Sea, Mediterranean and Australasia
• Red Sea to Far East, USA, NW Europe and Mediterranean
16 The Baltic Exchange (2014) The Baltic Code 2014 (p. 12).
60
C harter rates and state of the freight market
• West Africa to Far East, NW Europe, Mediterranean, Indian subcontinent, USA and South America
• North Africa to Mediterranean, NW Europe, USA and Far East
• North Sea to USA and Far East
• Baltic Sea to UK/Continent, Mediterranean, USA and Far East
• Black Sea to UK/Continent, Mediterranean, USA and Far East
• E. Coast Mexico to USA, Europe and South America
• Caribbean to USA, Europe, South America, Indian subcontinent and Far
East
• South America to USA, Europe and Far East
• Indonesia/Malaysia to Far East and Australasia
Table 2.5 VLCC Tankers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
280,000
270,000
265,000
260,000
260,000
280,000
280,000
AG (Arabian Gulf ) – US Gulf
AG (Arabian Gulf ) – Singapore
AG (Arabian Gulf ) – Japan
WAF (West Africa) – US Gulf
WAF (West Africa) – China
AG (Arabian Gulf ) – NW Europe
AG (Arabian Gulf ) – RS (Red Sea)
Crude
Crude
Crude
Crude
Crude
Crude
Crude
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 26) and Baltic Exchange
Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, pp. 38–39),
data compiled by A. Papadopoulos.
An example of a spot (voyage) charter concerns a fixture made in July 2015
involving a VLCC tanker (298,000 dwt, built 2008, double hull) owned by a
respectable Chinese shipping group which chartered the vessel to a first-­class
charterer, for a cargo voyage from Basrah Oil Terminal (Iraq) to Yingkou (China),
in order to transport 270,000 mt of crude oil, for a worldscale rate of 75, with
lay/­can dates on 8/10 August 2015.
An example of a time charter fixture was reported as made in July 2015,
concerning a VLCC vessel (317,000 dwt, built 2003, double hull) owned by a
respectable Greek-based shipowner which chartered his vessel to a first-­class
charterer, for a period of three years at $40,300/­day, to trade it worldwide.
2.4.2.2 Suezmax market
Suezmaxes (120–200,000 dwt) are also typically chartered on a spot basis, mainly
carrying crude and other dirty oil cargoes (e.g. fuel oil), but also period charters are
commonly found. Table 2.6 presents indicative types of spot employment for suezmaxes, typical cargoes and sizes, as well as some major ports/­areas of loading and
discharging. These vessels normally carry crude oil which is loaded in quantities of
about 130–140,000 mt. They are mainly trading in the Black Sea – Mediterranean Sea
area, but also from the West Africa to the USA and from the Arabian Gulf to India.
61
Charter rates and state of the freight market
Table 2.6 Suezmax Tankers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
130,000
Crude
135,000
130,000
130,000
130–140,000
130–140,000
130–140,000
Crude
Crude
Crude
Crude
Crude
Crude
WAF (West Africa) – Caribs/USAC (US Atlantic Coast) or
USEC (US East Coast) or USES
Black Sea – Med
WAF – UKC (United Kingdom or Continent)
AG (Arabian Gulf ) – East
Med – NW Europe
NW Europe – Caribs/USAC or USEC or USES
NW Europe – NW Europe
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 27) and Baltic Exchange
Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, pp. 38–39),
data compiled by A. Papadopoulos.
An example of a spot (voyage) charter concerns a fixture made in July 2015 for
a suezmax tanker (164,000 dwt, built 2002, double hull) owned by a respectable
Greek shipowner which chartered the vessel to a first-­class charterer, for a cargo
voyage from CPC Novorossiysk (Russia) to a port in the Mediterranean Sea area,
in order to transport 135,000 mt of crude oil, at a Worldscale rate of 85.
An example of a time charter fixture was reported as made in April 2015, concerning a suezmax tanker (167,000 dwt, built 2007, double hull) owned by a
respectable Greek-based shipowner which chartered his vessel to a first-­class
charterer, for a fixed period of two years plus charterers’ option for one more
year, at $29,000/­day for the fixed and the optional period.
2.4.2.3 Aframax market
Aframaxes (80–120,000 dwt) are usually chartered on a spot basis too, without period
charters being uncommon. Spot chartering is more balanced here between crude oil
carriage and other petroleum products, for example dirty cargoes such as fuel oil or
dirty petroleum products (DPP), or clean cargoes such as naphtha, clean petroleum
products (CPP), ultra low sulphur diesel, jetoil, gasoil etc. for the coated vessels.
The most important dirty petroleum products trades worldwide may be summarised as follows (this concerns all trades, thus includes also bigger shipments
that may be carried by suezmax or rarely by VLCC tankers, but also smaller
shipments most commonly carried by specialised panamax or handy product
tankers):
•
•
•
•
•
•
•
Middle East to Far East
NW Europe to Far East and USA
Mexico and Caribs to USA, NW Europe and Far East
Baltic Sea to UK/Continent, Mediterranean, USA and Far East
Singapore to Far East
Inter-­regional trade within Europe/Mediterranean
Inter-­regional trade within SE Asia and Far East
62
C harter rates and state of the freight market
The most important clean petroleum products trades worldwide may be
summed up as follows (this concerns all trades, thus may include also bigger
shipments that are rarely carried by suezmax, but also smaller shipments that
most commonly are carried by specialised panamax or handy product tankers)17:
•
•
•
•
•
•
•
•
•
•
•
Middle East to USA, Mediterranean, Europe and Far East
NW Europe to USA, Mediterranean, West Africa and Far East
Mediterranean to NW Europe, USA and Far East
US Gulf to South America and Europe
Caribbean to USA and Europe
Indian sub-continent to USA, Mediterranean, Europe and Far East
NE Asia to USWC (US West Coast) and WC South America
Singapore to worldwide destinations
Inter-­regional trade within Europe/Mediterranean
Inter-­regional trade within Middle East and Indian sub-continent
Inter-­regional trade within SE Asia and Far East
Table 2.7 presents indicative types of spot employment for aframaxes, typical
cargoes and sizes, as well as major ports/­areas of loading and discharging. Typical
trades of these vessels concern the transport of crude oil from various loading areas,
such as Baltic Sea, Egypt, Libya, Mediterranean Sea, Arabian Gulf, Europe, Indonesia or the Caribbean Sea. The cargo is loaded in quantities of about 70–100,000
mt and is imported in various areas of the world, such as Europe, the USA and
Asia. It may be stressed that aframax tankers with coated tanks are able to activate
in clean petroleum products trades. They are called “Long Range 2” (LR2) product
tankers as they carry clean cargoes on long distances and large quantities.
An example of a spot (voyage) charter concerns a fixture made in July 2015 for
an aframax tanker (103,000 dwt, built 2006, double hull) owned by a respectable
Table 2.7 Aframax Tankers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
100,000
80,000
80,000
70,000
80,000
70,000
80,000
80,000
Baltic Sea – UKC (United Kingdom or Continent)
Med – Med
North Sea – Continent
Caribs (Caribbean Sea) – US Gulf
Kuwait – Singapore
EC Mexico – USAC or USEC or USES
Med – NW Europe
Indonesia – Far East
Crude
Crude
Crude
Crude
Crude and/­or DPP
Crude
Crude
Crude
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 28) and Baltic Exchange
Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, pp. 38–39),
data compiled by A. Papadopoulos.
17 The Baltic Exchange (2014) The Baltic Code 2014 (p. 13).
63
Charter rates and state of the freight market
Greek shipowner which chartered the vessel to a first-­class charterer, for a cargo
voyage from Primorsk (Russia) to a port in the UKC (United Kingdom or Continent) area, in order to transport 100,000 mt of crude oil, at a Worldscale rate of 85.
An example of a time charter fixture was reported as made in July 2015, concerning a modern aframax tanker (110,000 dwt, built 2014, double hull) owned by a
respectable Norwegian-based shipowner which chartered his vessel to a first-­class
charterer, for a period of 30 months, at $27,600/­day. The vessel was to be delivered
to the charterers on 31 July 2015 at WCCA (West Coast Central America) area.
2.4.2.4 Product tankers: Panamax and Handy market
Although aframaxes or even suezmaxes may be able to carry oil product cargoes,
the cornerstone of the oil product trades are these two markets which are examined here together; the panamax vessels and the handies.
Panamaxes (60–80,000 dwt) are mostly chartered on a spot basis (time charters are not uncommon). This mainly concerns the transport of clean cargoes
such as naphtha, clean petroleum products (CPP), ultra-­low sulphur diesel, jetoil,
gasoil etc., but also in a less extent the transport of dirty cargoes such as fuel oil
or dirty petroleum products. Panamax product tankers are called “Long Range 1”
(LR1) vessels as they are able to carry clean cargoes on relatively long distances.
Handies (10–60,000 dwt) are also chartered mostly on a spot basis, overwhelmingly for the transport of clean cargoes and rarely for carrying dirty petroleum products. Handy product tankers are called also “Medium Range” (MR)
vessels as they are able to carry clean cargoes on medium distances. Sometimes
they may be seen in terminology as sub-­divided in “Medium Range 1” (MR1)
vessels of 25–40,000 dwt and “Medium Range 2” (MR2) vessels of 40–55,000
dwt. The typical MR product tanker is considered nowadays as that with a size
of about 48–53,000 dwt.
Table 2.8 presents indicative spot trades for petroleum cargoes (clean and dirty),
their cargo load quantities, as well as some major ports/­areas of loading and discharging. Clean products are loaded from various areas of the world, such as Arabian Gulf, Europe, US Gulf, Singapore, India, the Mediterranean Sea and the Black
Sea. The cargo is loaded in typical quantities ranging between 30–75,000 tons and is
imported in various areas of the world, such as Japan, Europe, the USA, Africa, Australia and South America. Dirty products are loaded from various areas of the world,
such as the Mediterranean Sea and the Black Sea, UK, Continental Europe and the
Caribbean Sea. The cargo is loaded in typical quantities ranging between 30–55,000
tons and is imported mostly in the US Gulf and the Mediterranean Sea areas.
An example of a spot (voyage) charter concerns a fixture made in April 2015
for a panamax tanker (75,000 dwt, built 2011, double hull) owned by a respectable Chinese shipowner which chartered the vessel to a first-­class charterer, for
a cargo voyage from Arabian Gulf to Japan, in order to transport 55,000 mt of
naphtha, at a Worldscale rate of 98.
An example of a time charter fixture was reported as made in July 2015, concerning a modern panamax tanker (75,000 dwt, built 2010, double hull) owned by
a respectable Chinese-based shipowner which chartered his vessel to a first-­class
64
C harter rates and state of the freight market
Table 2.8 Product Tankers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
75,000
55,000
55,000
55,000
50,000
50,000
50,000
38,000
Clean
Clean
Dirty
Dirty
Dirty
Dirty
Dirty
Clean
37,000
30,000
30,000
30,000
30,000
Clean
Clean
Clean
Clean
Clean or Dirty
AG (Arabian Gulf ) – Japan
AG (Arabian Gulf ) – Japan
Caribs – US Gulf or USAC
Med – Caribs/USES/US Gulf
NW Europe (ARA) – Caribs or US Gulf
Med – Med
EC Mexico/Caribs – USAC/USES
US Gulf – NW Europe/Continent/ARA or ECSA (East Coast
South America)
Continent (NW Europe) – USAC/Caribs
Med – Med
Singapore – East/Japan
Singapore – E. Australia
Black Sea – Med
Source: Drewry Maritime Research Shipping Insight (February 2016, pp. 29–30) and Baltic
Exchange Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015,
pp. 38–40), data compiled by A. Papadopoulos.
charterer, for a period of one year, at $20,000/­day. The vessel was to be delivered
to the charterers on 28 July 2015 at South China area.
For the handy sector an example of a spot (voyage) charter concerns a fixture
made in July 2015 for an MR product tanker (50,000 dwt, built 2013, double
hull) owned by a respectable Norwegian shipowner which chartered the vessel
to a first-­class charterer, for a cargo voyage from Arabian Gulf to UKC (a port in
UK or Continent), in order to transport 40,000 mt of jetoil (clean product), at a
fixed lumpsum freight amount of USD 1,837,500.
An example of a time charter fixture was reported as made in July 2015, concerning a handymax tanker (46,000 dwt, built 2004, double hull) which was chartered for a period of one year plus 12 months at charterers’ option (chopt), at
$18,750/­day for the fixed period and $20,250/­day for the optional one.
2.4.2.5 Chemical tankers
Chemical cargoes are categorised by IMO to categories I, II and III, with cargoes of category I being the most hazardous. Chemical vessels are categorised to
respective categories according to the quality of their tanks in order to carry such
cargoes. Most chemical tankers are categorised as IMO II and III vessels, as the
volume of IMO I cargoes is very limited.
The special feature of these vessels is called “parceling”, as they normally have
separate cargo tanks able to load and carry different cargo parcels of chemicals at
the same time in the ships’ coated or stainless steel tanks. The coating or cargo
tank material determines what types of cargo a particular tank can carry: stainless
steel tanks are required for aggressive acid cargoes such as sulphuric and phosphoric acid, while “easier” cargoes – such as vegetable oils – can be carried in
65
Charter rates and state of the freight market
epoxy-coated tanks. The coating or tank material also influences how quickly tanks
can be cleaned. Typically, ships with stainless steel tanks can carry a wider range of
cargoes and can clean more quickly between one cargo and another, which justifies
the additional cost of their construction and the higher charter rates earned.
Chemical tankers are either chartered on a spot basis or on time charters.
Table 2.9 presents indicative types of spot employment for chemical tankers,
indicative cargo parcel quantities, as well as some of the major trading routes and
ports/­areas of loading and discharging. It may be pointed out that, when comparing the time charter rates between coated and stainless steel vessels of the same
size, the latter seem to enjoy a considerable chartering premium. For example,
a 30–32,000 dwt IMO II chemical tanker with stainless steel tanks earned on
average $22,800/­day in 2014, whereas a similar vessel with coated tanks had an
average time charter rate of $13,400/­day for the same year.
Typical cargo parcel sizes are those of 1,000 mt, 3,000 mt, 5,000 mt, 10,000
mt or 15,000 mt, whilst typical vessel sizes range from 5–50,000 dwt. Major spot
routes concern the exports from the Middle East Gulf to various destinations,
the USA exports due to the “shale oil revolution”, trades among developed and
developing areas of the world, as well as the transatlantic routes between the
USA and Europe, the transpacific routes between the USA and Asia and the Far
East–Europe trades. Spot rates are typically expressed in US Dollars per mt of
cargo carried (not in Worldscale rates as in other tanker trades). Chemical tankers’ freight rates present lower volatility and less abrupt fluctuations than other
tanker markets, both in spot and time charter terms.
Table 2.9 Chemical Tankers Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
5,000
5,000
5,000
5,000
Houston – Rotterdam (transatlantic eastbound)
Rotterdam – Houston (transatlantic westbound)
Houston – Ulsan (transpacific westbound)
Far East – NW Europe
Chem.
Chem.
Chem.
Chem.
Source: Drewry Maritime Research Shipping Insight (February 2016, p. 32), data compiled by
A. Papadopoulos.
2.4.2.6 Tanker market: demand factors
The demand for tankers is crucially affected by numerous, constantly ­changing,
global factors. At this point, only some of the most important key drivers for the
tanker demand will be discussed below (the list is indicative, not exhaustive)18:
• Global imports of crude oil and oil products, as well as yearly growth
rate. Furthermore, seaborne oil imports monitored per geographical
18 Marsoft Tanker Market Report (May 2015), Giziakis, K., Papadopoulos, A. and Plomaritou, E.
(2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 200–207).
66
C harter rates and state of the freight market
•
•
•
•
•
•
•
•
area, i.e. North America, OECD Europe, Japan, China, other Asia/
Pacific, Latin America, Africa, East Europe and Middle East.
Oil prices and stockbuilding. For example, the collapse in oil prices
which started in the fourth financial quarter of 2014 and continued in
2015, brought about a strong oil inventory building in both the US
and China. In the US, crude inventories reached an 80-year high by
April 2015.19 The sharp rise in US inventories was driven also by a contango oil market phenomenon witnessed in early 2015. Besides, the low
oil price environment led to a level-off of oil production in the US and
other geographical areas, changing the seaborne oil trade patterns.
GDP growth in a global level and particularly in China and North America, as well as other major economical areas, such as European countries
of OECD, Japan and developing Asia.
Oil consumption globally and in specific geographical areas, such as
North America, OECD Europe, Japan and China.
Oil production in North America, OECD Europe and OPEC countries
(Saudi Arabia is the leading producer). For example, rising OPEC output was the catalyst behind the increase of oil trade demand in 2015.
Refineries’ output and location.
Geopolitical factors (e.g. lifting of Iranian sanctions in respect of oil
production in 2016, political unrest in Libya since 2011 etc.).
Demand in ton-­mile terms for crude oil and products, as well as triangular chartering opportunities. For example, in 2015 West African
and Latin American exports shifted from North America to longer-­haul
Asia/Pacific destinations, whilst crude exports from the Middle East to
North America increased significantly. This not only boosted ton-­mile
demand and fleet productivity, but also created triangular chartering
opportunities (limited backhaul ballast voyages).
Seasonality.
2.4.2.7 Tanker market: supply factors
Some key indicators about the supply of tanker vessels may be summarised
below (the list is not exhaustive):
• Fleet annual growth, which is determined by ordering and deliveries on
the one hand and scrapping on the other.
• Fleet structure. In respect of that, the following indicators may be examined:
◦ Orderbook to existing fleet: This ratio measures (at the time of measurement) the number or tonnage capacity of the vessels that are expected
to be built in the next 2–3 years, as a percentage of the existing fleet.
As an example of that, the orderbook for all tanker vessels stood at an
historically moderate 19% of the whole fleet in January 2016.20
19 Marsoft Tanker Market Report (May 2015).
20 Clarksons Research Oil and Tanker Trades Outlook (January 2016).
67
Charter rates and state of the freight market
◦ Age breakdown: This shows the age structure of a fleet. For example,
a ratio showing which percentage of the fleet is over 15 or 20 years old
shows how aged a fleet is and how many vessels may be scrapped in
the next years. It is worth to mention that the tanker fleet in total was
exceptionally modern in January 2016, as only 4% of the fleet was over
20 years old.21 This was due to the fact that the tanker fleet had already
been renewed by newbuildings, as IMO imposed the completion of a
phasing out scheme of all single-­hull tankers up to the end of 2015.
◦ Replacement ratio: This measures the orderbook (number of vessels
or tonnage capacity in dwt) of the vessels to be built, as a percentage
to the existing fleet which is over 15 years old. As an example, it may
be mentioned that in January 2016 the replacement ratio (orderbook
to fleet of over 15 years old) stood at 114% for the total tanker fleet,
showing a rising orderbook after a previous two-year freight boom,
in relation to a relatively modern tanker fleet.22
• Fleet productivity, technological factors and innovation. Fleet productivity increases when average fleet speed gets increased. Due to strong tanker
freight rates in 2014–2015 fleet productivity increased significantly, offsetting some of the benefits from the rise in ton-­miles demand. Besides,
this is always influenced by technological factors, such as automation,
innovation and cost-­effective fuel management (e.g. eco-­ships) etc.
• Floating storage. Larger and older vessels may be used for oil storage
purposes. When this occurs, tankers’ available supply for transport is
essentially decreased, thus freight rates may be positively affected.
• Fleet utilisation and vessels’ lay-­up. The crude tanker fleet utilisation
rate stood at about 90% in early 2015, the highest level since mid-­2010.23
This is contrary to what happened in the dry bulk market in the same
period and reflects the strong tanker freight market which happened in
2014–2016. In respect of tankers’ lay-­up, the market reached its all-­time
highs during the period of the two oil crises which occurred in the late
1970s and early 1980s.
2.4.2.8 State of the tanker market
From the last financial quarter of 2014 up to the end of 2016 the tanker market
recovered well after a six-year deeply recessive period which resulted in continuously falling freight rates after the financial crisis began at the end of 2008. This in
turn had followed a booming six-year period which lasted from 2003 till 2008. It is
remarkable that a modern VLCC tanker could have been chartered for over USD
90,000 per day on a one-year time charter in mid-­2008, whilst the same charter type
rates were formed at less than USD 20,000 per day on average for a similar vessel
in 2013. In March 2016 the one-year time charter rate of a modern VLCC tanker
21 Clarksons Research Oil and Tanker Trades Outlook (January 2016).
22 Clarksons Research Oil and Tanker Trades Outlook (January 2016).
23 Marsoft Tanker Market Report (May 2015, p. 3).
68
C harter rates and state of the freight market
was standing at a very decent amount of USD 45,000 per day, whilst the average
rates for spot employment of such a tanker type were at about USD 40,000 per
day. From the historical development of freight rates, the long-­term cyclical pattern
of the tanker market may become obvious, as well as the high volatility of crude
tanker rates. It is worth commenting that the level of tankers’ lay-­up was amazing
during the oil crises of the 1970s and the protracted shipping depression in 1980s.
Tables 2.12 and 2.13 towards the end of this section present the historical development of the yearly average one-year time charter rates for the most indicative
types of crude tankers (aframax, suezmax and VLCC), product tankers (handysize, handymax and panamax), as well as various sizes of chemical tankers, ranging from 1980 up to 2015, as kindly provided by Drewry Maritime Research.
2.4.3 Gas carriers market
LPG vessels vary greatly in respect of their size and cargoes carried. They are either
chartered on a spot basis or on period charters. Table 2.10 presents indicative types
of spot trades for LPG carriers, indicative cargoes and quantities carried, as well
as some major trading routes and ports/­areas of loading and discharging. There is
a wide variety of gas cargoes carried (LPG, ammonia, fuel gas etc.), cargo shiploads, trade routes and vessel sizes ranging between 3,000–85,000 cubic metres
of cargo carrying capacity. For Very Large Gas Carriers (VLGCs > 60,000 cbm)
the benchmark trade is from Ras Tanura (Arabian Gulf ) to Chiba (Japan). Major
other exporters are the USA and Qatar, whilst other importers are China, India
and South Korea. As these vessels are capable of crossing the new locks of Panama Canal, their role is of great importance nowadays. Large Gas Carriers (LGCs
40–60,000 cbm) are few in number and commonly fixed on time charters. They
are capable of crossing even the old, narrower locks of the Panama Canal, however
the completion of the Canal’s expansion is going to affect this vessel size. For mid-­
sized vessels (20–40,000 cbm), LPG and ammonia are the most important cargoes. Major exporters are located in the Black Sea, Trinidad and Tobago, Middle
East and North Africa, whilst major importers are in India, Morocco and Europe.
The smaller LPGs (3–23,000 cbm) are semi-­refrigerated or ethylene or pressurised
Table 2.10 LPG Indicative Spot Trades
Cargo Shipment (tons)
Single Voyage
43,000
35,000
20,000
4,000
4,000
3,000
1,800
Arabian Gulf – Japan
Baltic Sea – US Gulf
Baltic Sea – Med
US Gulf – NWE (NW Europe)
NWE (NW Europe) – US Gulf
North Sea – Portugal
North Sea – ARA
LPG
NH3 (ammonia)
NH3 (ammonia)
Ethylene
Btd (butadiene)
LPG
LPG
Source: Drewry Maritime Research Shipping Insight (February 2016, pp. 36, 38), data compiled by
A. Papadopoulos.
69
Charter rates and state of the freight market
vessels able to carry various cargoes which have their own market fundamentals.
For example, petrochemicals are traded between the USA and Europe when arbitrage conditions come up, ethylene is mainly produced in Europe and imported in
Asia, whilst propylene remains popular in local and intra-­regional trades.24 Spot
rates are contracted and reported in US Dollars per mt of cargo carried.
LNG vessels are together with some offshore vessel types the most technologically advanced, highly sophisticated and expensive ships of the shipping industry. It is roughly estimated that in the middle of 2015 about 70% of the fleet was
employed in long-­term period charters and only the remaining 30% was trading
spot. The cargo for such vessels (LNG) is highly specialised, without any diversification. Most of the vessels are exclusively serving specific LNG projects requiring
regular transport services. As per mid-­2015 LNG charter rates were in a continuously falling mode, deteriorating gradually, this reflecting the softer demand
growth, a considerable increase in the LNG fleet and most of all the lower energy
price global environment. For example, the one-year time charter rate for a modern
160,000 cbm ship averaged at $35,000/­day in April 2015, compared to $70,000/­
day in 2014 as average and $150,000/­day in July 2012.25 The technological development and delivery of new vessels have led to the evolution of a two or three tier
charter market, based on vessel specifications. Initially, conventional LNGs had
steam turbines for their propulsion, whereas other modern and highly advanced
propulsion systems were gradually developed, first the DFDE (Dual Fuel Diesel
Electric) and then the TFDE (Tri-­Fuel Diesel Electric) systems. The word “tri-­
fuel” originates from the fact that the power generation engines are able to use three
different types of fuel. Major LNG exporters are Middle East, Australia, Asia and
North/West Africa. Major LNG importers are Japan, South Korea, China, Europe,
whilst the role of other countries is growing, such as India, Mexico and Brazil.
Tables 2.12 and 2.13 towards the end of this section depict the historical development of the average one-year time charter rates for various sizes of LPG carriers, ranging from 1980 up to 2015, as kindly provided by Drewry Maritime
Research.
2.4.4 Containerships market
Almost all the fixtures of containerships concern period charters, mostly vessels’
time charters from the independent shipowners (also called “charter owners”)
to the liner operators (also called “operating owners”). It is known that no or
extremely limited spot chartering activity exists in liner shipping as vessels are
employed/­utilised by the lines in pre-­determined routes and schedules (liner services). Table 2.11 presents indicative types of time charters for various size categories of containerships.
24 Clarksons Research Shipping Review & Outlook (Spring 2015 pp. 48–52); Drewry Shipping
Insight (7 May 2015, pp. 36–40).
25 Clarksons Research Shipping Review & Outlook (Spring 2015 pp. 54–55); Drewry Shipping
Insight (7.5.2015, pp. 42–45).
70
C harter rates and state of the freight market
Table 2.11 Containerships Indicative Types of Employment
Liner Services or (scarce) Spot Charters
or
Time Charters
Vessel Type
Time Charter Duration
Neo-­Panamax, 9,000 TEU, gearless
Intermediate, (wide beam, old post-­panamax)
4,500–5,500 TEU, gearless
Intermediate (old panamax), 4,250 TEU, gearless
Intermediate (old panamax), 3,500 TEU, gearless
Sub-­Panamax, 2,500 TEU, geared
Handysize, 1,700 TEU, geared
Handysize, 1,100 TEU, geared
Feeder, 700 TEU, gearless
3-year Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
12-month Time Charter (T/C)
2.4.4.1 Post-­panamax market
This category comprises all the container vessels that are not able to cross the
Panama Canal. After the completion of expansion works, containerships able to
pass from the new locks of the Canal have a maximum carrying capacity of about
15,000 TEUs. Although this size borderline is not strict, vessels larger than this
may safely be called “Post-­Panamax” containerships.
This is the fastest growing segment of the containership market having attained
the newbuilding attention amongst liner operators. These vessels are often called
“Ultra Large Container Vessels” (ULCVs). Such boxships are almost exclusively
deployed on the Far East–­Europe trade where the major liners are now fiercely
competing through alliances and vessel sharing agreements (see sections 1.1.3 and
1.3.6). The freight rate for carrying a 20-foot container at the Shanghai–­Europe
trade averaged at $620 per TEU in 2015, suffering a significant drop from the
respective average of $1,172 per TEU in 2014.26 Backhaul trade from Europe to
the Far East is typically the weaker leg of this trade lane. Port restraints currently
limit the trading of these vessels on other routes. These ships represented about
15% of the total boxship fleet capacity in mid-­2015. Newbuilding interest in these
vessels picked up in 2015, including six 20,150 TEU boxships reported ordered,
breaching the 20,000 TEU barrier. While deployment of mega-­vessels on other
routes is limited, opportunities may eventually spread to other trades in the long
­run. This segment of the market is overwhelmed by vessels belonging to the liner
operators, thus time charter fixtures are scarce.
2.4.4.2 Neo-­panamax market
This rapidly growing segment concerns vessels of 8–15,000 TEUs and is characterised by vessels’ efficiency derived from size and deployment flexibility. Such
ships are principally trading on Transpacific, Far East–Europe and North–South
26 Clarksons Research Shipping Intelligence Weekly (15 January 2016).
71
Charter rates and state of the freight market
trades (mostly with Latin America). Vessels of 12–15,000 TEUs are often characterised as “Very Large Container Vessels” (VLCVs), whereas vessels of 8–12,000
TEUs as “Large Container Vessels” (LCVs).
The completed expansion of the Panama Canal allows for the passage of larger
container vessels, potentially reducing the cost of trans-­ocean shipping services
between the Far East and US East and Gulf Coast ports. The maximum size of a
containership that can transit through the Canal has increased from that of about
5,000 TEU capacity (previous “panamax” size) to about 14–15,000 TEU (the so-­
called “neo-­panamax” size), bringing about a major breakthrough to this market
sector, as well as a requirement of a considerable investment for the improvement
of US East Coast port infrastructure.27
Asia–­US West Coast route (transpacific trade) is significantly serviced by this
category of vessels. The freight rate for carrying a 40-foot container from Shanghai to US West Coast averaged $1,482 per FEU in 2015, much lower than the
average of $1,975 per FEU in 2014. On the contrary, box freight rates from Shanghai to US East Coast (another transpacific trade) averaged at $3,727 per FEU in
2014 (13% higher than their average 2013 level), but kept rather strong in 2015
averaging $3,669 up until the September of the year. This stresses the point that the
“state” of a market as a whole may be even mixed within a specific period and the
reasons for these diversifications may be varied. In our reference above, a number
of cargoes were diverted from the US West Coast to the US East Coast, partly as a
result of port congestion. On North–­South trades, freight rates performed weakly
in 2014, due to supply matters arising from vessel upsizing and “cascading”.28
It may be pointed out here that the state of the liner market, i.e. the freight rate
paid by shippers to liner operators for carrying a box to its destination, affects
significantly the state of the containerships charter market, namely the hire
rates paid from the liner operators to the independent containership owners to
charter-­in vessels on period charters (mostly time charters). This is due to the fact
that liner operators are willing to pay more to charter-­in vessels from the open market (i.e. from the independent charter owners), when they expect that such vessels
will be commercially capable of serving their liner transport requirements against
their clients (shippers), with a profit. In other words, one expects that time charter
rates for containerships would rather be higher in periods of higher liner freight rates.
With regards to this segment of vessels, an example of a time charter fixture
made in January 2015 was concerning a containership of 9,000 TEU (newbuilding delivery at her first charter), owned by a specialised Greek containership shipping company which chartered his vessel to a Chinese first-­class
charterer (liner operator), for a period of five years, at $39,200/­day. This vessel
was then called “post-­panamax”, but now it is included in the “neo-­panamax”
category.
27 US Department of Transportation, Maritime Administration Panama Canal Expansion Study
(November 2013, pp. 130–131).
28 Clarksons Research Shipping Review & Outlook (Autumn 2015, p. 70).
72
C harter rates and state of the freight market
2.4.4.3 Intermediary and old panamax market
This category of vessels ranging between 3–8,000 TEUs includes both the previously called “panamax” and the wide-­beam, shallow draft previously called
“post-­panamax” vessels, which now, after the construction of the third larger
lane in the Panama Canal, are all able to cross this critical sea passage. All these
medium-­sized vessels are usually employed on North–­South and non-­core East–­
West trades. Two examples of such trades are the Shanghai–­Santos trade lane
and the Shanghai–­Durban trade lane. This vessel category was influenced by the
“cascading” effect, which occurs when higher-­capacity vessels are employed on
the non-­mainlanes, generally exerting downward pressures on freight earnings.
Newbuilding contracts for the ex-­panamax size were minimum in previous
years, with just few orders reported, as containership newbuilding interest has
concentrated on the huge size sectors. The Panama Canal expansion has been
responsible for the reduction in ex-­panamax ordering. Although many of these
vessels were re-­directed in other trades, their narrow-­beam and fuel-­inefficiency
make them less competitive over more modern and fuel efficient wide-­beam
designs. While it initially seems that ex-­panamax vessels of about 4–5,000 TEUs
may be negatively influenced by the expansion of the Panama Canal, in contrast
new trading and chartering opportunities for the whole segment of the 3–8,000
TEU intermediate fleet may be explored in the future.
An example of a time charter fixture for such an intermediate-­sized containership was reported as made in March 2015, concerning a vessel of 5,086 TEU,
built in 2010, owned by a specialised in containerships German owner which
chartered his vessel to a French first-­class charterer (liner operator), for a period
of 12 months, at $12,700/­day.
2.4.4.4 Small containerships market
Vessels of 2–3,000 TEU are often called “sub-­panamax”, those of 1–2,000 TEU
are called “handysize” and those carrying less than 1,000 TEU are called “feeders”. The segment of the smaller sizes often suffers supply pressures coming
from the “cascade” effect, as well as being restrained by port and operational limitations. As seen in Table 2.11, the benchmark one-year time charter rates are for
geared vessels of 2,500 TEU, 1,700 TEU, 1,100 TEU and 700 TEU within this
category. Intra-­Asian and intra-­European routes are some of the most common
forms of liner trading for these vessels. The fleet has been decreasing since 2012,
as a result of both accelerated demolition levels and relatively limited investment.
An example of a time charter fixture for a sub-­panamax containership was
reported in June 2015, concerning a vessel of 2,546 TEU, built in 2010, owned
by a specialised in containership operation Hong Kong based public company
which chartered his vessel to a Swiss-­based first-­class charterer (liner operator),
for a period of 11–12 months, at $11,700/­day.
Another example of a time charter fixture for a handy containership was
reported in July 2015, concerning a vessel of 1,100 TEU, built in 2015, owned
by a Greek company which chartered his vessel to a Japanese first-­class charterer
(liner operator), for a very short period of 20–40 days, at $10,750/­day. This is
73
Charter rates and state of the freight market
to illustrate that even short time charters may be agreed in the charter market of
containerships between independent charter owners and liner operators.
Another example of a time charter fixture for a feedermax containership was
reported in May 2015, concerning a vessel of 830 TEU, built in 2005, owned by
a German company which chartered his vessel to a Swiss-­based first-­class charterer (liner operator), for 24 months, at $6,500/­day.
2.4.4.5 Containerships market: demand factors
The demand for containerships is crucially affected by numerous, constantly
­changing, global factors. At this point, some of the most important key drivers
for the containership demand will be shortly commented below (the list is indicative, not exhaustive)29:
• GDP growth in a global level and particularly in China, the USA, European countries of OECD and Japan.
• Global container trade and in particular TEU imports in North America,
Europe, Japan, Southeast Asia, China, S. Korea, Taiwan, Hong Kong,
Australia, Latin America, Africa.
• Commodity prices.
• Global manufacturing and location of manufacturing capacity.
• Geopolitical risks.
• Currency exchange and interest rates.
• Seasonality.
2.4.4.6 Containerships market: supply factors
The key indicators about the supply of container vessels may be summarised
below (the list is not exhaustive):
• Cellular and non-­cellular fleet annual growth, which is determined by
ordering and deliveries on the one hand and scrapping on the other.
• Fleet structure. In respect of this, the following points may be examined:
◦ Orderbook to existing fleet: As it has been explained before, this ratio
measures the number or carrying capacity of the vessels that (at the
time of measurement) are expected to be built in the next 2–3 years,
as a percentage to the existing fleet. As an example of that, the orderbook for all container vessels stood at 19% of the whole fleet in January 2016, where by far the heaviest orderbook was for the largest
sizes (orderbook 70% for vessels over 12,000 TEU).30
◦ Age breakdown: This shows the age structure of a fleet. For instance,
the containership fleet was considered as a very modern one in early
2016, since only 4% of the total fleet was over 20 years old (note:
29 Marsoft Container Market Report (March 2015).
30 Clarksons Research Container Intelligence Monthly (January 2016).
74
C harter rates and state of the freight market
all of the aged vessels were under 5,000 TEU).31 This was due to the
heavy ordering activity of the previous years and the predominance
of mega-­containerships in the newbuilding market.
◦ Replacement ratio: This measures the orderbook (number of ships or
tonnage capacity in TEU) of the vessels to be built, as a percentage
of the existing fleet which is over 15 years old.
• Idle (laid-­up) fleet. The lower the idle tonnage the faster the market
recovery when market fundamentals improve.
• Fleet productivity, technological factors and innovation. Due to weak
freight rates in 2014–2016 fleet productivity remained low, regardless
of the low fuel prices environment which could otherwise have led to an
increase of fleet average speed.
• Fleet utilisation. The liner fleet utilisation rate stood at about 82% in
2015,32 reflecting the weak state of the market.
• Vessels’ cascading.
• Major shipping alliances controlling the liner services offered in main
trades. For example, in 2015 only few global alliances controlled nearly
100% of capacity deployed in the two premier markets of Asia–­Europe
and Transpacific routes, as well as a substantial share in the Transatlantic routes. By this form of co-­operation each alliance controls a sizeable
presence and reaps operating savings induced by fleet efficiency and
improved vessel utilisation.33 Further to that, the liner market is consolidated by mergers and acquisitions of shipping companies and this may
influence also the effective vessels’ supply.
• Oil prices as a significant part of vessels’ cost.
• Port and terminal productivity (congestion problems).
2.4.4.7 State of the containerships market
The containership market passed a six-year period of extraordinary profits in
2003–2008 (similarly to the other major shipping markets), then slumped in 2009
when the world trade collapsed, this was followed by a two-­year short recovery of rates in 2010–2011 and then a phase of low freight rates, mostly due to
the heavy ordering and deliveries of mega-­ships. It is remarkable that a modern
gearless containership of 4,400 TEU could have been chartered for USD 50,000
per day on a one-year time charter at the end of 2004/­early 2005, whilst a similar
vessel would have fetched less than USD 7,800 per day on average in 2009 and
only USD 5,800 per day in March 2016.
Tables 2.12 and 2.13 present the historical development of the yearly average
one-year time charter rates for various sizes of containerships, ranging from 1980
up to 2015, as kindly provided by Drewry Maritime Research.
31 Clarksons Research Container Intelligence Monthly (January 2016).
32 Marsoft Container Market Report (March 2015, p. 9).
33 Marsoft Container Market Report (March 2015, p. 42).
75
Source: Drewry Maritime Research (2016)
Table 2.12 Average One-Year Time Charter Rates of Major Ship Types (US$ per day): 1980–1997
Source: Drewry Maritime Research (2016).
Table 2.13 Average One-year Time Charter Rates of Major Ship Types (US$ per day): 1998–2015
Charter rates and state of the freight market
2.5 Freight indices
The freight indices or indexes are financial tools created to monitor the current
state, conditions and trends of the freight market. As previously mentioned, the
freight or charter market is not a single, homogeneous market in which all trends
follow a uniform pattern. It consists of different individual markets, which are
neither strictly secluded from each other nor necessarily interdependent, often
resulting in diverse directions within the entire freight market. This diversification of the freight markets brings about the need for creation of respective freight
rate indicators.
As part of the shipping market practice, the creation of freight indices is mainly
based on the four fundamental criteria of charter market segmentation, namely
the type and size of vessels, the kind and nature of cargoes carried, the type and
duration of charters, as well as the geographical aspect of vessels’ trading.34
Since freight indices are measuring the current state of the freight markets, their
configuration is always so variable as the shipping market itself is. Therefore, an
extensive presentation of freight indices can not be fully exhaustive and up to
date. For this reason, only a brief discussion of the Baltic Exchange indices will
be set out below.
The Baltic Exchange publishes on a daily basis a series of freight indices for the
dry and wet bulk markets, based on the professional assessments of independent
shipbrokers who are located in major shipping centres worldwide. For the dry bulk
market, the most important indices are the Baltic Dry Index (BDI ) which measures
the overall freight rate level in the dry bulk market, together with the Baltic Capesize Index (BCI ), the Baltic Panamax Index (BPI ), the Baltic Supramax Index
(BSI ) and the Baltic Handysize Index (BHSI ), each of which expressing the general state of the respective freight market segment. For the tanker market, the most
important such indices are the Baltic Dirty Tanker Index (BDTI ), which expresses
the general state of the tanker freight market in dirty cargo trades (e.g. crude oil,
fuel oil, other dirty products), as well as the Baltic Clean Tanker Index (BCTI ),
which expresses the level of the tanker freight market in clean cargo trades.
A freight index is typically based on a weighted calculation system whereby
selected chartering alternatives (e.g standard voyage routes, time charters, trip charters, round voyages etc.) of a specific vessel group participate in the index formation
at a predetermined weighting factor. The level of freight rates on these benchmark
chartering options are examined daily, either through the actual chartering fixtures
or from estimates of authorised shipbrokers. The weighting factor of each chartering
option in the calculation of the index is determined in accordance with the importance of this type of charter. The current level of the index is then shaped by a daily
examination of freight rates on the benchmark charters which make up the index, in
accordance with the predetermined weighting factor contribution. A freight index is
usually expressed either in terms of index points or US Dollars per day.
34 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis
Publications, 3rd edition, in Greek, pp. 281–282).
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C harter rates and state of the freight market
All the above may be illustrated by a short example. As per January 2015, BCI
was a basket of 11 benchmark chartering options, with standard trading specifications determined by the Baltic Exchange, composed of seven standard voyage
routes weighing in total 50% of the index and four standard period charters (time
charters or round voyages) weighing the rest 50% of the index.35 Similarly, all other
indices are typically composed of benchmark charter types per vessel grouping.
Finally, it is worth emphasising on the most important freight index of our days.
Since 1 November 1999, “Baltic Dry Index” (BDI ), as the successor of “Baltic
Freight Index” (BFI ),36 has been the representative indicator of the freight rate
levels in the entire dry bulk market. BDI measures the overall state of the dry
bulk freight market and often is regarded as a forerunner of the industrial output
and world economy trends. BDI is expressed as index points and calculated daily
by the following formula37:
[(BCI TCavg + BPI TCavg + BSI TCavg + BHSI TCavg) / 4] * 0,113473601
where:
BCI = Baltic Capesize Index
BPI = Baltic Panamax Index
BSI = Baltic Supramax Index
BHSI = Baltic Handysize Index
TCavg = Time Charter average = the average rate of time charters involved in
determining each individual freight index.
The multiplier was first applied when the BDI replaced BFI and has changed over
the years as the contributing indices and the methods of BDI calculation have
been modified.
2.6 Freight derivatives
At this last part of the chapter, a short reference will be made to a highly sophisticated, modern, specialised and advanced tool of managing the freight market risk; the freight derivatives. It is noted that analysis of this subject will be
restricted only to familiarising the reader with basic principles, since presenting
the full spectrum would require extensive econometric and financial knowledge
which goes beyond the scope of this book.
The story started from the Baltic Exchange which initially undertook an
important role as an international freight exchange centre when, in 1985, it first
35 The Baltic Exchange Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, pp. 34–35).
36 BFI was for many years the most significant shipping index, as it measured the daily freight
rate level in the dry bulk market from 4 January 1985 to 1 November 1999, when it was replaced by
BDI.
37 The Baltic Exchange Manual for Panellists: A Guide to Freight Reporting and Index Production (January 2015, p. 37).
79
Charter rates and state of the freight market
inaugurated the Baltic International Freight Futures Exchange (BIFFEX ). On
this exchange there were two daily sessions for trading charterparties and futures
contracts which were to be performed at some later date (up to two years) against
a weighted freight index. This index was then called Baltic Freight Index (BFI ),
the predecessor of BDI, reflecting the state of the dry bulk freight market. By
trading the BIFFEX freight futures contracts, owners, charterers and other parties
on the shipping scene, including speculators, could protect themselves (“hedge”)
against the risk of or play on the volatility of freight rates and time charter hires.
In 1991 an additional, more advanced, freight derivatives methodology was
introduced; the Forward Freight Agreement (FFA) which gradually replaced the
BIFFEX contracts. This system met the need to make contracts that were more
specific rather than to settle against a global freight index. The FFAs are “over
the counter (OTC) forward products traded principal to principal ”, as opposed
to the BIFFEX contracts which were “futures” traded via an exchange. Should
more security for the performance of the contract be required, the FFA deal
can also be done through a clearing-­house, such as the Norwegian Futures and
Options Clearing House (NOS), the London Clearing House (LCH), the Singapore Exchange (SGX), the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). When a trade is cleared through an exchange, then
the clearing house becomes the counter-­party to each of the original parties to the
transaction, thus credit risk is minimised.
It should be emphasised that an FFA is often tailor-­made to suit an owner’s or
charterer’s particular need for a hedge. The following example is a classic and
simple form of how the FFA trade works.
A buyer of an FFA (charterer) and a seller of an FFA (shipowner) agree to
trade an FFA contract. The Baltic Exchange today produces a broad series of
daily assessments and indices broken down into wet and dry freight markets, so
there is a variety of cargoes and routes to be chosen from in order to be used as
the “underlying object ” of the derivative. Through their FFA broker, the charterer
and the owner will agree:
•
•
•
•
the agreed route;
the day, month and year of settlement;
the contract quantity; and
the contract rate at which differences will be settled.
Typically, the actual settlement price (i.e. the future freight level against which
the FFA settlement will be made) is normally agreed as the average value of an
agreed freight index or a specific route of that, at a specific future time (e.g. the
average value of a specific route of Baltic Panamax Index on the last seven days
of an agreed month).
Assume that the FFA buyer (charterer) has a panamax cargo Continent/Far
East to move two months ahead from now and is concerned that the time charter
(T/C) market will go up within the near future. The FFA seller (shipowner) has
four ships coming open on the Continent in the relevant period and is seeking to
80
C harter rates and state of the freight market
safeguard a minimum T/C rate for at least one of his ships. Negotiations start and
the parties finally agree an FFA contract rate at $12,800 per day. FFA settlement
will probably be made against the Route P2A_03 of the Baltic Panamax Index
(BPI).
Two months later, at the date of settlement, the average value of the last seven
days of the agreed BPI route turns out to be $14,000 per day, which is higher than
the agreed FFA contract rate. Thus, the seller (shipowner) pays the buyer (charterer) the difference of $1,200 × 65 days (total time of voyage) = $78,000 that the
charterer will use to offset against the high rate he will have to pay for a vessel
on the real spot market. The shipowner should be able to fix his ship close to the
$14,000 per day on the prevailing physical market and, although the shipowner
is losing some on the FFA, he has safeguarded an income for one of the ships.
The other three ships will benefit from the improved rates on the physical (spot)
market.
81
CHAPTER 3
Chartering information
A basic element of shipbroking and chartering practice is the exchange of information. In respect of that, accuracy, reliability, speed, timing and other qualitative aspects are of utmost importance. This chapter presents the major sources of
chartering information, the most important information centres in the world, how
this information is transmitted within the chartering network, what the means
of communication are and how significant the time factor is. Great emphasis is
given on the description of the role of the shipbrokers and agents in handling
this business data. It is underlined that chartering negotiations through orders,
position lists, indications, offers, counter-­offers etc. form information channels of
paramount importance, thus this chapter is closely related with chapter 8, where
chartering negotiations are analysed.
3.1 Types and importance of information
Those who are engaged in chartering and shipbroking practice are important
receivers and distributors of information. The continuous flow of information
and the treatment and evaluation of the collected material are necessary elements for a correct judgment of the current situation and trends in the freight
markets. Quality of information (correctness, reliability, accuracy, speed, timing
etc.) is always of utmost importance. The main sources of such information are
described in detail below.
3.1.1 Market reports
These are reports circulated by the Baltic Exchange or other influential organisations such as BIMCO, Intertanko, ASBA, on a membership basis, or by specialised market analysts on a subscription basis (e.g. Drewry, Clarkson, Marsoft),
or by big shipbroking firms/­houses to shipowners, charterers, other brokers and
agents, banks etc. giving a concentrated picture of the prevailing situation of
the shipping market for a day, a week, a month or even a year. By comparing
the conclusions made in various market reports with one’s own judgment of the
situation, it is possible to form a fairly accurate view of the state of the market in
the sectors of particular interest. A comprehensive market report contains comments primarily focused on the most important freight markets, that is, dry cargo
or tanker or container or gas, but also, for example, on the sale and purchase
of ships or on more specialised markets. Generally, the different tonnage sizes
are also dealt with separately (e.g. a dry bulk market report usually contains
83
Chartering information
separate analysis for capes, panamaxes, supramaxes, handies). The comments are
illustrated by examples of recently made representative fixtures.1 Furthermore,
the market developments within different geographical chartering areas may be
commented on separately (e.g. a dry bulk market report focusing either on the
Atlantic or on the Pacific basin), or for different commodities (e.g. fixtures concerning grain, coal, iron ore etc. are grouped and presented together).
Examples of market reports may be seen in Figures 3.1, 3.2, 3.3 and 3.4.
­Figure 3.1 presents a dry cargo report specialising in panamax and kamsarmax
bulk carriers in 2016, whilst Figure 3.2 is a tanker market report from 2011.
Figures 3.3 and 3.4 are of high historical importance as describing the dry bulk
freight markets situation just before the outbreak of the Global Financial Crisis at
the last financial quarter of 2008.
3.1.2 Orders
The following sections discuss the orders, position lists, indications and offers/­
counter-­offers only as major sources of chartering information. As these also
form the fundamental parts of a chartering negotiation, their analysis and
respective examples are presented in chapter 8. An order is the common denominator for every request for transportation of a specific cargo from one port to
another. An order may also concern a requirement from a shipper or owner
of cargo to time charter a ship for short or long duration. Between charterers
and their brokers, between owners and their brokers and between the broking
firms, such orders are circulated one by one or by lists covering a number of
orders. The party requesting chartering service is said to “place an order on the
market ” and will then await reactions from the tonnage that may be interested
in the order.
An example of an order is the following:
OUR DIR CHRS IMPERIAL SHIPPING, LONDON
35/45,000 DWT – GRD
DELY SOUTH SWEDEN
27TH OCTOBER
1 TC TRIP VIA BALTIC TO EAST MED
CARGO – SAWN TIMBER UNDER/ON DECK
DURATION ABT 40 DAYS WOG
REDELY DLOSP 1SP EGYPT MED (INTN ALEXANDRIA)
3.75 PCT ADDCOM PAST US
This order concerns the charterers’ interest for a geared vessel of 35–45,000 dwt
to make a trip charter carrying timber from Sweden to the East Mediterranean
Sea.
1 When a ship is chartered and a freight (or hire) rate is agreed between the shipowner and the
charterer, then the vessel is said to be “fixed”.
84
Chartering information
Figure 3.1 Dry Cargo Market Report
Source: Simpson Spence Young (SSY), 19 April 2016
85
Chartering information
Figure 3.2 Tanker Market Report
Source: www.pareto.no/­p.-f.bassoe (accessed 18 March 2011)
86
Chartering information
Figure 3.3 Daily Panamax Bulker Market Report
Source: Simpson Spence Young (SSY), 16 September 2008
87
Chartering information
Figure 3.4 Weekly Dry Cargo Market Commentary (12 September 2008)
Source: Baltic Exchange, 12 September 2008
88
Chartering information
3.1.3 Position lists
This contains information about where and when vessels are expected to become
available (open) for new employment. Positions are circulated by shipowners
and operators as a guide to brokers and charterers. The intention is that these
position lists will generate interest and suggestions for next charter employment
of the ships mentioned.
An example of a position list is the following:
PLSE PROPOSE FOR OUR LOCAL OWNS:
M/V ILYA 6.964 MTS DWAT ON 6.972 M, DWCC 6200 ON
WINTERMARK
ST VINCENT FLAG, BUILT 1994, ITF ICE 1A SUPER
SINGLEDECK/OPEN HATCH BULK CARRIER
134.2 M LOA/19.90 M BEAM 4 HOLDS/4 HATCHES
10610 CBM BALE/10720 CBM GRAIN
OPEN EAST MED – BEG. NOVEMBER
PREFERS DIRECTION CONT/BALTIC
This position list seeks for the next charter of a vessel. It gives the ship’s short
description, expressing that the vessel will be “open” at East Mediterranean in the
beginning of November with preferred next direction to Continent/Baltic Sea area.
3.1.4 Indications
An initial indication of the intentions, terms and conditions under which the shipowner or the charterer is willing to start chartering negotiations. This term is used
by chartering brokers and concerns information such as quantity of cargo to be
carried, dates that a ship or a cargo will be available, the amount of freight that a
charterer is willing to pay or the shipowner is willing to receive.
3.1.5 Offers/­counter-offers
These are the most important pieces of information exchanged during chartering negotiations between the parties involved. Shipowners, charterers and their brokers participate in influencing the state of the freight market, and the information interchanged
in relation to the business in question is as important as the agreement reached. For
a judgment of the state of the market and the influence on the market development,
this type of information is of equal importance whether a fixture is concluded or not.
The crucial elements of a chartering negotiation are the offers and counter-­offers
exchanged between the negotiating parties, leading in a charter agreement.
3.1.6 General sources of information
Other necessary information concerns cost-­related items about the operation and
despatch of vessels, for example, costs for the handling of certain cargoes in
89
Chartering information
various ports, port dues and charges associated with the ship’s call, costs for
canal passages, notes about bunker prices etc. Information about port congestion, hindrances from ice, opening and closing of canals and other important
passages, notes on maximum draught allowed in ports, ships’ cargo-handling
equipment and its capacity for different commodities, as well as availability of
labour to load/­unload a vessel, constitute other valuable pieces of information.
Moreover, various sudden geo-­political occurrences and general economic and
social circumstances always have a decisive effect on the development of the
international shipping market. Such pieces of information, as described above,
may be sourced either directly from shipowners, charterers, brokers and port/­ship
agents, commonly through private communications, or by specific information
circulated publicly via the internet or on a membership basis by major organisations (e.g. BIMCO).
Some examples of other sources of information are the following:
• Shipbroking and Agency Network: Chartering information sourced from
the global network of shipbrokers is always of utmost importance,
whereas valuable information in respect of the ports (e.g. port restrictions, dues, expenses, fees etc.) should be traced from local agents.
• Databases: Some maritime organisations (e.g. BIMCO, Intertanko etc.),
or maritime research experts (e.g. Lloyd’s List Intelligence, Clarksons’
Shipping Intelligence Network, Drewry, Fearnleys, Barry Rogliano
Salles, RS Platou etc.) publish databases and reports on a membership or subscription or free of charge basis with important information
regarding shipping companies, ships, freight rates, vessel values, cargo
volumes and trade routes, ports, costs etc.
• Commodity Reports: Some international organisations issue reports
related to the developments of world trade, such as the “Grain Market
Report” which is issued monthly by the IGC (International Grains Council), the “Bunker Report” issued by the Baltic Exchange, the “Statistical
Review of World Energy” by BP, the “Market Reports” by Clarksons,
the “Market Intelligence” by Barry Rogliano Salles, the “Fertilizers
Quarterly” by RS Platou, reports for oil and energy matters issued by
the International Energy Agency or the US Energy Information Administration, etc.
• Commodity Price Bulletins & Handbook on International Trade and
Development Statistics: UNCTAD (United Nations Conference on
Trade and Development) publishes a monthly newsletter with product prices and an annual handbook with statistical data concerning the
development of international trade.
• Country Reports: Researches regarding the economic situation of various countries are carried out by embassies, ministries and other state
agencies. Such researches are also carried out by UNCTAD in co-­
operation with OECD (Organisation for Economic Co-­operation and
Development).
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Chartering information
• Reports on the Global Economy: For instance, IMF (International Monetary Fund) issues a series of researches regarding the developments in
world economy.
• Lloyd’s Publications and Informa Group services: Highly specialised
information is provided to shipping market practitioners and organisations around the world, through publishing (books, reports, magazines,
newspapers), events (conferences, seminars), training, market research
intelligence and expertise (consulting, in-­house training, distance learning courses). From a chartering and shipbroking aspect, the most valuable Lloyd’s publications and services are considered to be the “Lloyd’s
List” electronic newspaper, the “Lloyd’s Law Reports”, the “Lloyd’s
Shipping Economist” and most of all the “Lloyd’s List Intelligence”
electronic database network, together with a plethora of shipping book
titles etc.
• Internet network: Web pages compose a major source of shipping information. The reader may find a list of widely recognised shipping links
at the end of the bibliography for further research.
3.2 Information centres
London, New York and Tokyo are of primary interest as information centres, but
Oslo, Piraeus, Hamburg, Copenhagen, Geneva and Paris also play a crucial role
in the distribution of shipping information. In the last few decades, due to the
growth of Asian economies, Singapore, Hong Kong, Shanghai, Seoul and Taipei
have grown rapidly in importance, whilst other shipping locations worth mentioning are Vancouver, Hamilton, Istanbul, Monte Carlo, Antwerp, Rio de Janeiro
and Mumbai.2 Shipowners who operate their ships worldwide are also in daily
contact with shipping centres in many other countries. At this point emphasis
will be given to specific maritime organisations which play an influencing role in
chartering matters on a global level, on one way or another.
3.2.1 Baltic Exchange
This is a unique and very old institution focusing on the exchange of shipping
information. It is headquartered in London, with regional offices in Athens, Singapore and Shanghai. In the past, owners, charterers and brokers used to meet
there regularly for a few hours around noon to distribute cargo circulars and to
exchange information in absolute confidentiality and trust. The prevailing state
of the market was discussed, formal freight negotiations could take place and
fixtures were sometimes concluded on “the floor”. Today, this part of the work
relating to the Baltic is normally done via telephone, e-­mail and internet. However, the Baltic Exchange still plays an important role, with a total membership
of over 600 companies. Membership is not just limited to shipbrokers, charterers
2 Clarkson Research Services Shipping Intelligence Weekly (27 March 2015, p. 20).
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and shipowners, but expanded to financial institutions, maritime lawyers, educators, insurers and related associations.
Baltic’s international community reflects the majority of world shipping interests and commits to a code of business conduct encapsulated in the motto “our
word our bond ”. Baltic Exchange members are responsible for a large proportion
of the total dry cargo and tanker fixtures as well as for most of the global sale and
purchase activity of merchant vessels.
The members benefit from the shipping market information produced. This information is based on assessments made by a global panel of recognised shipbrokers.
Daily reporting is provided on freight rates of over 50 trade routes, as well as market
guidance on second-­hand values, demolition prices and fixtures of ships. Independent, high quality dry, wet and gas freight market information is provided by the
Baltic Exchange, whilst the freight derivatives market (FFAs) is also covered. In
addition, training courses about chartering and freight derivates are organised.
Baltic Exchange contribution is decisive on international chartering matters,
mainly through the publication of a series of shipping and freight indices. These
are used as general indicators of the freight markets’ performance, as benchmarks against physical charter contracts and as settlement tools for freight derivative trades. The role of the Baltic Exchange in publishing freight indices has
been described in section 2.5. Further to that, it is worth adding that the Baltic
Exchange is one out of four organisations which created the “Laytime Definitions for Charter Parties 2013”, together with BIMCO, FONASBA and CMI (see
chapter 15 and appendix 3).
3.2.2 Baltic and International Maritime Council (BIMCO)
The Baltic and International Maritime Council (BIMCO) in Copenhagen is a
leading maritime organisation with around 2,300 members, being shipowners,
operators, managers, brokers and agents spread all over the world. BIMCO’s core
objective is to facilitate the commercial operations of its members by developing
standard contracts and clauses, providing a system of document editing (called
BIMCO “Idea”), as well as offering quality information, advice and education.
BIMCO promotes fair business practices, free trade and open access to markets, having a strong commitment to the harmonisation and standardisation of all
shipping-­related activities.
Its documentary committee is dealing with the design and development of
shipping documents. Today, there is a list of about 100 printed standard charterparty and other document forms, as well as 100 standard clauses that have in one
way or another been approved by BIMCO. Due to its wide membership, influence and global coverage, BIMCO may also be asked to provide information on,
for example, congestion in a certain port, requested port dues and charges, port
regulations and practices (rules of the trade) etc. If somebody in shipping circles
repeatedly and deliberately violates the rules of the trade or has otherwise acted
improperly (e.g. when there is slow-­paced settlement of outstanding amounts),
then he may be officially reported to BIMCO, which in turn can put pressure on
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such parties to remedy the fault. Owners and charterers quite frequently use the
opportunity to ask for a BIMCO consultancy on dispute matters.
From a chartering and shipbroking view, BIMCO’s influence is wide and absolute. It is worth noting that almost all the relevant standard shipping documents
used worldwide (e.g. charterparties, bills of lading, booking notes, timesheets
and statements of facts used in laytime practice, or even agency agreements,
ship management or sale & purchase contracts etc.) are either issued or approved
by BIMCO. Charterparty drafting concerns all types of charter and covers the
whole spectrum of shipping markets, for example, from the commonly used and
famous general-­purpose voyage charterparty “Gencon”, the general time charterparty “Gentime”, the “Barecon” a typical contract for bareboat charters and
the “Gencoa” a typical one for contracts of affreightment, to less popular but
very specialised documents, as for instance the “LNGvoy”, a first published in
2016, voyage charterparty created to reflect the developing spot market of LNG
vessels. BIMCO’s role is similarly broad, extensive and crucial in drafting of
balanced bills of lading and wording of charterparty clauses. Finally, it must be
stressed that BIMCO is the leading organisation behind the issuance of “Laytime
Definitions 2013” (see chapter 15 and appendix 3).
3.2.3 International Association of Dry Cargo Shipowners (INTERCARGO)
INTERCARGO members mostly operate bulk carriers in the international dry
bulk trades. Its main role is to work with its members, the regulators and other
shipping associations to ensure that the dry bulk industry operates safely, efficiently, profitably and in an environmentally friendly manner. To achieve this,
it actively participates in the development of global legislation through the
International Maritime Organisation (IMO) and other similar bodies.
INTERCARGO’s publications are important sources of information for
the shipping market practitioners. The “INTERCARGO Benchmarking Bulk
Carriers Report”, which is issued annually, contains statistical and benchmarking
information on bulk carriers. It provides guidance to owners, port state control
authorities, flag states, financiers, terminal operators, charterers and other industry stakeholders.
3.2.4 International Association of Independent Tanker Owners
(INTERTANKO)
INTERTANKO has been representing the interests of independent tanker owners
since 1970, seeking to ensure that oil is always shipped and carried by sea safely,
responsibly and competitively. INTERTANKO functions as a forum where the
tanker industry meets, policies are discussed and statements are created. It is a
valuable source of first-­hand information, opinions and guidance about tanker
and oil matters.
Membership is open to independent tanker owners and operators, i.e. non-­oil
companies and non-­state controlled tanker owners, who fulfil the Association’s
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membership criteria. The organisation has over 200 members, whilst associate
membership stands at some 240 companies related to the tanker industry.
INTERTANKO has opened offices in Singapore and Washington DC, in
addition to its principal offices in Oslo and London. Within the shipping industry itself, INTERTANKO participates in discussions within the International
Maritime Organisation (IMO) where it has non-­governmental status, and the
International Oil Pollution Compensation Fund (IOPC). In addition, it has a consultative status at the United Nations Conference on Trade and Development.
INTERTANKO is actively involved in a wide range of tanker topics, which
include commercial, technical, legal, operational, environmental, documentary and market issues. Direct contact with the members and original sources
enables it to select and promulgate the information which is essential to the
tanker industry. INTERTANKO’s information and advisory services include
the “Weekly News”, courses, seminars, free access to a range of web-­based
services and various publications. Members and associate members are also
entitled to direct expert opinions from resourceful and experienced lawyers,
mariners, naval architects, marine engineers, economists and other specialists
within the association.
Focusing on the chartering matters, in a tanker market traditionally dominated by the charterers (oil majors) which follow their own standard charterparty forms, INTERTANKO has historically played a key role in shaping more
balanced standard charterparties for various charter types. Namely, it has issued
in the past the “Tankervoy ’87 ” for tanker voyage charters, the “Interconsec ’76 ”
for consecutive voyages charters and the “Intertanktime ’80” for tanker time
charters.
3.2.5 Federation of National Associations of Shipbrokers & Agents
(FONASBA)
FONASBA provides a “united voice” for the world’s shipbrokers and agents. As
a federation, its membership is made up of the national associations of shipbrokers and agents of 49 countries, 43 of which as full members with a further six
countries represented by associate or candidate members. Individual companies
are also eligible to join. All members of the national associations which make up
FONASBA are encouraged to obtain the FONASBA Quality Standard, proving
their financial standing and commitment to quality.
Founded in 1969, the organisation promotes fair and equitable practices and
ensures that the needs of its members are understood at both a governmental level
and across the maritime industry. It focuses on liner and tramp agency matters,
chartering and shipbroking issues, sale and purchase and documentary affairs
across all shipping markets. FONASBA is based at London’s Baltic Exchange.
FONASBA has a consultative status at the International Maritime Organisation (IMO), United Nations Conference on Trade & Development
(UNCTAD) and the World Customs Organisation (WCO). It also works
closely with shipowning bodies such as BIMCO, Intercargo and Intertanko.
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FONASBA’s relationship with the European Union is handled through its sub-­
committee, the European Community Association of Ship Brokers & Agents
(ECASBA) established in 1990 to represent European shipbrokers and agents.
ECASBA provides critical input about European seaports and their services,
short-sea shipping, shipping safety and EDI policies, as well as for customs and
administrative procedures.
It is worth pointing out that FONASBA was one out of the four organisations
which co-­operated in issuing the “Laytime Definitions 2013” (see chapter 15 and
appendix 3). Moreover, it has published the “Time Charter Interpretation Code
2000” attempting to help in eliminating charterparty disputes often arising from
time charters (see chapter 12 and appendix 7).
3.2.6 Institute of Chartered Shipbrokers (ICS)
The Institute of Chartered Shipbrokers (ICS) is an internationally recognised
professional body representing shipbrokers, ship managers and agents. The
Institute was founded in 1911 and awarded a British Royal Charter in 1920.
With 24 branches in key shipping areas and 4,000 individual members, ICS
membership represents a high professional standard across the shipping industry,
particularly within chartering and shipbroking cycles. As a major provider of
shipping-­
related education and training, ICS delivers its main educational
programme – tutor ship – directly from its London head office and under
agreement through its distance learning centres worldwide.
3.2.7 Association of Ship Brokers and Agents (USA) Inc. (ASBA)
ASBA is an independent membership trade association, established in 1934, currently with offices in the USA and Canada. Its purpose is to bring together the
members, namely shipbrokers (dry cargo, tanker, sale & purchase) and agents,
as well as affiliate members (shipowners, operators, charterers and tug companies), which all shall have to operate in the USA or Canada for at least one year.
ASBA advances and fosters the ideals and standards of professional conduct and
practices and is a means through which members with common interests can
communicate.
ASBA organises conferences and offers distance learning courses and live
seminars designed to give participants a broad and comprehensive understanding of shipping industry’s developments. ASBA is well ­known for the publication of a widely used, balanced standard form of time charterparty, under the
title “NYPE” (New York Produce Exchange), which was updated in 2015 and its
sample may be found in appendix 6. Besides, ASBA sells its charterparty editor
software, a licensed, annually renewed product which intends to facilitate chartering negotiations, charterparty drafting and finalisation. This system supports a
wide range of documents (dry cargo and tanker, voyage and time charterparties,
together with few miscellaneous other forms) and offers advantages to the shipbrokers and their principals.
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3.3 Information network
It is of great importance for shipowners, charterers, brokers and agents to establish a network of contacts which catches all interesting business opportunities
and by which adequate information is quickly transmitted. Different brokers
specialise in different markets or market sectors. By communicating with those
brokers who are specialists in the chartering of, for example, grain, and who have
good and direct contacts with the big grain houses in London, Paris, Geneva,
Hamburg or New York, an owner can keep well abreast of the availability of
grain cargoes worldwide. He can also get current information through the brokers about the freight levels that may at any time be interesting to the potential
charterers and – no less important – he can get information about the freight rates
asked for by the competing tonnage.
In this way the owners follow continuously all the market sectors of interest.
Charterers find their information in a corresponding way. For them, it is important to communicate with brokers who have contact with all owners operating
suitable ships and who have an interest in the cargo or trade or charter type in
question.
What has been said above is valid mainly for tonnage operated in the open
market. The information network for liner trading has a different set-­up. The
individual liner company (shipowner, carrier, operator) or a liner alliance, maintaining traffic in a certain trade, will have a number of liner agents as integrated
part of the shipping service (see section 3.5.3). These agents divide the areas that
generate cargoes for booking into geographical areas of interest, within which
each individual agent keeps in contact with the local customers (shippers), either
directly or through forwarding agents (freight forwarders). The liner agents and
the shipowner (liner company) normally enter into a formal agreement, a so-­
called “exclusivity agreement ”, by which the agents are guaranteed certain rights
and benefits but at the same time they agree not to book any cargo or otherwise
work for the account of competing lines. In principle, the liner operator cannot
book cargo on his own, from the area covered by the agreement, without indemnifying his agent.
3.4 Information coverage
From the owner’s point of view, one might think that it would be convenient not
to use an intermediary, but instead to keep direct contact with interested charterers. Such contacts do exist, but then it is often a question of a very restricted
market where a reasonably good view can be maintained through a small number of contacts. In the dry cargo or in tanker market this is not possible, since
owners would then miss important or, on certain occasions, even crucial market
information.
In order to keep the chartering staff as small as possible and to reduce his
business inquiry expenses, the owner may even decide to channel all information through one or two brokers only. These brokers will then act as more or
less exclusive “agents” for this owner and will be responsible for the necessary
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information, that is, collecting, treating and evaluating material to present to the
owner. The disadvantage with such an arrangement is that the owner gets information which is trimmed, thus important judgments are then made by the middle-­
man instead of the owner himself.
The other extreme is the owner working through a very large number of broker
contacts without especially favouring any of them. Possibly one would thereby
get most of the orders circulating in the market and the same order could be
received from a number of different sources. Such an arrangement may, however,
result in the work at the owner’s office becoming slow and laborious. Another
disadvantage is that the owner may also find that none of the brokers will put in
the amount of effort which an exclusively appointed broker is supposed to.
In principle, the same approach is applicable from the charterer’s point of
view, but at the same time the charterer’s position is somewhat different. Especially with respect to the important commodities, the charterers do keep a fairly
careful check on tonnage available and freight levels through their own contacts.
For various administrative reasons, they may also decide to separate their shipping division from the original body of the company and name it as their exclusive agent with authority to seek for tonnage and fix the company’s cargoes. On
the other hand, a charterer or shipper of cargoes able to be carried either as bulk
or general cargoes (e.g. shipments of salt that may be carried in bags or in bulk at
holds) must communicate both with liner agents working in the trade concerned
and with brokers dealing with suitable tonnage in the open market, so as to find
out the proper way of moving the cargo.
3.5 Information handlers
Information management is paramount in all business aspects of the modern era.
Although many people may know the same piece of information, only some may
be able to create added value by handling that information. In chartering and
shipbroking business, the role of shipbrokers and agents is crucial in that perspective. Chartering brokers and port agents play an influential role in the chartering process (from the negotiation to the closing and execution of a charter),
while the role of liner agents and freight forwarders is important in the cargo
booking procedure of the liner industry. It goes without saying that the shipbrokers’ role is the most important of all, thus it is analysed in greater depth below.
3.5.1 Shipbrokers (chartering brokers)
In the open charter market (including bulk business, tramp operations and vessel
charters of the liner market) the shipowner and the charterer will often come in
contact through shipbrokers (chartering brokers)3, although in today’s ­electronic
3 A shipbroker either specialises in chartering matters, then called “chartering broker”, or in ship
sale and purchase transactions, then called “s&p broker”. Within the context of this book, the words
“broker” and “shipbroker” shall always mean the chartering broker.
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world the traditional role of the shipbroker has changed gradually and the negotiations are usually carried out by e-­mail. Brokers have informative, intermediary,
consultative and co-­ordinating functions along the transportation chain.
A chartering broker acts on behalf, in the name of, and for the account of, one
principal, either an owner or a charterer, and this is made known to all the parties
concerned at an initial stage of discussions. A chartering broker brings the parties
in contact, negotiates the contract of carriage, gives advice and recommendations with respect to appropriate offers and proposals, draws up the charterparty,
follows up on contractual matters, arranges financial matters and assists in case
of disputes. Normally, a shipbroker does not have the authority to conclude an
agreement for the principal, but only to negotiate. The situation is quite different
where a broker makes a contract in his own name but for the account of someone
else. In such cases there is an “undisclosed principal” situation. It is not unusual
that the principal’s name is not made known initially, but the broker presents
himself for example as “agent for first-­class charterer”, which, of course, is a
rather risky undertaking from the broker’s side. In an English case the House of
Lords found that one broker involved had no “usual or apparent authority” and
that a person acting for one of the parties lacked “actual as well as ostensible
­authority” (see Armagas Ltd v Mundogas S.A. (The Ocean Frost) [1986] 2 Lloyd’s
Rep. 109 (HL)).
A chartering broker ordinarily specialises in a certain market or in a sector of a
market. In chartering, an owner and a charterer have real interest in the broker’s
sources of information, his particular knowledge and his skill at negotiation.
Normally, both parties will have their own broker – the “owner’s broker” and
the “charterer’s broker”. Thus, both parties negotiate through their representatives, who should do their best to preserve their respective principal’s interests
and intentions. Sometimes the broker will have a certain authority to bind his
principal, but normally the negotiations will be carried out in close co-­operation
between the principal, the broker and the respective counter-­parties. When the
agreement has been concluded, the broker may obtain specific authority to sign
it (as recap or charterparty), which he does sometimes “as agent only” without
mentioning the party or parties, or sometimes “as agent for X ”. In the former
case, certain legal problems may arise as to who has really entered into the agreement. An owner may choose to do his business through one sole confidential or
exclusive broker, or he may prefer to work through a number of brokers, who will
then have equal opportunities to do the business.
Sometimes the broker introduces a “first-­class charterer” or a “first-­class
owner/­carrier” without mentioning a name. Should it appear later that the carrier
or charterer is not first-­class, the broker may become liable for the consequences
of his wrong description. Both parties have good reasons and rights to check on
their counterparts. Several years ago a carrier entered into a charterparty with,
as he believed, an entity named “Indian Shippers”. When, after the voyage, the
owner claimed deadfreight, he discovered that there was no entity called “Indian
Shippers”, but that this was merely a collective description for a number of shippers. This illustrates the importance of identifying the other contracting party.
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In a market with such widely differing sectors, one broker cannot possibly
cover all sectors with his direct connections. He will then leave his order with
other brokers, who in their turn may have good connections with colleagues representing an interested counter-­party. A broker thus engaged in efforts to bring
together an owner’s confidential broker with the broker of a suitable charterer is
engaged in “competitive chartering” and is called a “competitive broker”. However, it must be said that in today’s competitive shipping market these fixtures
are becoming very difficult to make. All brokers endeavour to tie to themselves
a number of principals (owners or charterers) for whom they may work as one
of some few confidential brokers. As broker, it is an advantage to work on such a
confidential or exclusive basis, since the broker may thereby have a fairly secure
employment and a certain continuity in his activities.
The main function of the broker is to represent his principal in charter negotiations (see chapter 8). The broker has to work for and protect his principal’s
interests in the following ways:
1. The broker should keep his principal continuously informed about the
market situation, the market development, the current freight rates,
the available cargo proposals and shipment possibilities. He should,
in the best possible way, cover the market for the given positions and
orders. Furthermore, the broker provides his views on the market with
respect to future freight rate movements. If a chartering broker of a shipowner expects freight rates to increase in the short term, he will most
likely advise his principal to wait a few days before fixing. If he expects
a decline of freight rates in short term, he will advise his principal to fix
as soon as possible, before the decline. If the chartering broker represents
a charterer then his advice will be the opposite of that given to the shipowner. Some shipbroking companies publish regularly market reports
(see section 3.1) and undertake tailor-made researches for their clients.
2. The broker should act strictly within given authorities in connection
with the negotiations. Sometimes the broker may have a fairly wide
framework – a wide discretion – within which to work when carrying
out the negotiations, however he should always take into account some
absolute limits which must not be exceeded.
3. The broker should in all respects work loyally for his principal and
carry out scrupulously and skilfully the negotiations and other work
connected with the charter.
4. The broker may not withhold any information from his principal nor
give him wrong information. Nor may he reveal his principal’s business
“secrets” or act to the advantage of the counter-party in the negotiations
in order to reach an agreement.
5. A “first-­class broker” should not advance cargo shipment or vessel
employment proposals to his principal if the business is not seriously
founded or if there may be doubts about the counter-­party’s honesty or
solvency.
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6. The broker should also protect his principal’s interests by preventing
wrongfully worded or incomplete orders from being forwarded until
they have been corrected or completed. The broker also has a duty to
preserve his principal’s reputation.
7. The broker has a duty to take an active part in the negotiations and
give advice and recommendations with respect to appropriate offers,
proposals and compromises. He should also try to find out the actions
of competitors in order to secure as many advantages as possible for his
principal. A “mailbox” broker who only furthers information, offers and
counter-­offers without judging and processing them can hardly count on
a high degree of appreciation from the owner or the charterer.
Chartering brokers are classified into various categories depending on the person they represent, the charter market in which they operate, their personality and
temper etc. More specifically:
• Brokers who act on behalf of shipowners seeking cargoes (“chartering
brokers seeking cargoes”) and those who act on behalf of charterers
seeking ships (“chartering brokers seeking ships”).
• In accordance with the broker’s personality and temper, somewhat
informally a distinction is often made between a “freight broker” and a
“charterparty broker”. The former is the broker who is always successful in contracting somewhat above the market level, but who will never
risk losing business due to the details of a particular charterparty clause.
The latter will contract at the actual market level, but he will always try
to phrase every single charterparty clause so that it will be as advantageous as possible to his principal. It must be stressed that a charterparty
that has not been carefully drafted may cause considerable losses to
one of the parties, but a business result can only be determined after the
post-­fixture calculation, disbursement of expenses and final settlement.
One may say that every clause has a value and a price.
• “Dry cargo broker” is the chartering broker who specialises in the dry
cargo market or in a sector of this market. “Tanker broker” is the chartering broker who specialises in the liquid cargo market or in a sector of
this market.
• “Competitive broker” is the broker who works freely and individually
in the charter market, while “in-­house broker” is the broker who acts
exclusively for a shipowner or a charterer. It is common for at least
the large shipping companies to have within their own organisations
separate departments or divisions or even companies working as their
brokers. Besides, large brokers may also be directly involved in operating or even owning fleets. Having an in-­house broker within a shipping
group or a shipping company is not always a guarantee that an order
given to the broker will also be brought out into the open market, or vice
versa. Therefore, when the owner and the broker are in the same group
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of companies, certain orders may be prevented from going out into the
open market and instead they will be reserved for the “house” tonnage,
if the broker is not fully independent.
• In order to entice an owner to work “his way”, the charterer’s broker
may draw up the order in such a way that it indicates, more or less, that
he has a close or particularly good relationship with the charterer. In
this context, “exclusive” means that a broker is the only one who works
on the order, thus instructed directly and preferentially by the charterer.
Exclusivity has the same meaning when it concerns the relationship of
the broker with the shipowner. The expression “local charterers” indicates a geographically close connection of brokers with charterers. The
word “friends” may also be used under different circumstances by brokers to indicate a special connection.
A broker will hardly ever have full liberty to “go out on the market” with an
order to “fix best possible”. Instead, he will normally have an authority to negotiate
on behalf of his principal within a framework of certain specified terms and conditions, which, if they are not accepted by the counter-­party, the broker must get new
instructions. This will be repeated until both parties are in total agreement.
When an owner or a charterer, having received an order or a position, demands
additional information or wishes to look more carefully into the possibility of
a charter agreement, he is regarded as being “committed ” to this broker. If the
principal wants to open up negotiations, it is regarded as good practice to work
through the broker to whom he (the principal) is already “committed”. Sometimes brokers try to commit a principal on the telephone by advancing the order
and trying at the same time to discuss the possibility of the order. Such a way of
proceeding is not regarded as a first-­class method.
Normally, the privilege of choosing a broker channel is considered to belong
to the owner. But then again regard should be given to factors such as: Who
first presented the order or position? Who has the most “direct” connection?
Which of the brokers seems to have the best and most complete information and
background with respect to the business in question? Who has better bargaining
power? Consideration is also normally given to whether a previous connection
with the same customer has been made through a certain broker with respect to
similar charters. Further, personal relations naturally play an important role.
Sometimes the owner and the charterer, after having concluded one agreement
through a broker, may do subsequent business directly with each other. Such
direct business may be a consequence of their wish to avoid paying commissions.
It may happen also that a competitive broker has presented an order which for
some reason the owner’s confidential broker has not received via his direct channel or which he has not observed. The owner may then be tempted to inform his
direct (exclusive) channel about the order thereby “committing himself ” through
this channel instead of giving the competitive broker a chance. Such or similar
methods are considered improper and not quite acceptable from an ethical point
of view.
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Charterer’s shipbroker will also have as one of his duties, to make out the
original charterparty in accordance with the agreed terms and conditions, immediately after the charter negotiations have been concluded. Another important
duty of both brokers is to follow up how the transport undertaking is performed,
so that the parties receive continuous information, notices are given correctly,
freight or hire are duly paid etc.
A number of standard forms of charterparties contain a printed term on brokerage (i.e. the broker’s remuneration for providing his services), but leave it to the
parties to fill in the percentage, for instance, Gencon ’94 (see appendix 1, part II,
clause 15 “brokerage”):
A brokerage commission at the rate stated in Box 24 on the freight, dead-­freight
and demurrage earned is due to the party mentioned in Box 24. In case of non-­
execution 1/3 of the brokerage on the estimated amount of freight to be paid by the
party responsible for such non-­execution to the Brokers as indemnity for the latter’s
expenses and work. In case of more voyages the amount of indemnity to be agreed.
Instead of the agency fees that are usually agreed and paid to the agents on a
lump sum agency fee basis, brokers typically receive remuneration calculated as a
certain percentage of the gross freight figure. The intermediaries involved will normally be entitled to remuneration only when the charter agreement has been concluded and/­or connected contracts have been signed. The broker’s income is thus
dependent on the freight market and the size of the deal involved. Such size may
be measured in terms of the cargo quantity (in a spot charter) or the length of the
charter period (in a period charter). Normally, every broker involved in a charter
deal will get an amount corresponding to 1¼ per cent (1.25%) of the gross freight.
Unless otherwise agreed (which is very rare in practice), such broker’s remuneration is generally referred to as the “commission” or “brokerage”. It is paid by
the owner and the total actual percentage for a certain deal, the total commission,
should be specified in every order presented to the owner. The brokerage should
cover broker’s expenses and give him a net profit. As mentioned, the commission
or brokerage is always calculated on a percentage of the gross freight or hire and,
depending on what is agreed during the negotiations, the so-­called “demurrage”,
“ballast bonus” and “deadfreight” (see chapters 14 and 15) may also be the basis
of commission, in addition to the gross freight at a voyage charter. Thus, it is common in the dry cargo sector that every broker gets 1.25% and the relevant freight
calculations will normally be based on 2.5% or 3.75% depending on the number
of brokers involved. It is, however, not uncommon for the total commission to
be even higher, but in those cases a so-­called “address commission” will almost
invariably be involved. In many trades and with time charters it is usual that part
of the commission is “returning to the house” (charterer) which in practice thus
reduces the freight or hire to be paid. Such address commissions may be up to
5% (heavy address). The reason for this practice is said to be that the charterers’
shipping department, for book-­keeping purposes, must show some kind of income
from their activities. State trading companies regularly include a 5% address commission in their orders. Furthermore, it is quite common to find that a charterer’s
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broker, who is working on an exclusive basis for his principal, will be entitled to
2.5% brokerage. As mentioned, the owners will pay all commissions and therefore,
they may try to cover such costs by a corresponding freight or hire increase.
Finally, it must be added that continuing structural change in the shipping
industry has also led to changes for brokers, port agents and other intermediaries
in shipping. There is a tendency for intermediaries to be more often involved in
disputes. A consequence is that the need for insurance of intermediaries has
increased. P&I Clubs for shipbrokers, port agents, managers and other intermediaries in shipping have been founded, and these clubs seem to be well established
as a necessary complement to the traditional P&I Clubs.
3.5.2 Port agents
In bulk shipping (including also tramp operations of all vessel types), the task
of the port agent is to represent the owner and assist the vessel for the owner’s
account, so that the ship will have the best possible despatch during a port call.
It is important that the owner employs a reliable and energetic agent. Port agent
will be remunerated by a fixed agency fee which varies considerably between
different ports and also depends on the tonnage of the vessel.
The port agent should in all respects assist the master in his contacts with all
local authorities, including harbour authorities, and he also has to procure cash to
master (CTM), provisions and other necessities, assist in medical matters, boarding
and expatriation of the crew, co-­ordinate possible repairs and maintenance of the
ship, communicate orders and messages to and from the owners etc. Loading and
discharging will often be for the charterer’s account (in period charters and when
FIO terms or similar variations are agreed in the voyage charterparty). The charterer should then prefer to be entitled to nominate the port agent in order to further
his interests. The question of appointing an agent may be an important detail in the
charter negotiations, since the parties have to establish whether the charterparty
shall stipulate “owner’s agents” or “charterer’s agents”. If a charterer’s agent is
to be appointed it may be an advantage from the owner’s point of view that the
actual clause states, for example, “charterer’s agent to be nominated, but if actually
appointed by the owner, the latter will do so only by authority of and for the account
of the charterer”. If the owner has to accept the charterer’s agent he may protect
his interests to a certain extent by appointing a “husbandry agent ” or “protective
agent ” who will then assist the master and look after the owner’s interests in order
that the charterer’s agent will not act to the disadvantage of the owner and the ship.
The agent arranges on behalf of the shipowner services relevant to the ship and
its cargo, such as4:
• Allocating ship’s berthing place to load and/­or unload, as well as ensuring that the master is well aware of port requirements and vice versa.
4 Plomaritou, E. (2015) What Agents Need to Know about Chartering (London, Lloyd’s Maritime
Academy, Module 6 of Distance Learning Course “Diploma for Ship and Port Agents”, p. 15).
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Chartering information
• Arranging the pilot and tug boat services.
• Organising the safe and effective loading and/­
or unloading of
merchandise.
• Liaising with the people involved in the actual loading or discharging,
who would be stevedores (the case of dry cargo) or the jetty management (the case of liquid cargo).
• Preparing the cargo manifest; this gives detailed information on cargo
to be handled. Sometimes, the agent may even sign the bill of lading on
behalf of the ship’s master.
• Advising import/­export cargo owners.
• Advising the customs office of the ship’s arrival and reporting the cargo
on board.
• Ensuring that the ship’s documentation complies with international and
local regulations, as this will be inspected by port state control, customs,
classification societies or other authorities when they board the ship.
• Providing information on the crew and any passengers to the department of immigration and citizenship.
• Organising ship repairs and maintenance.
• Arranging the delivery of stores, supplies, charts and spares to the ship.
• Organising crew changes, any associated immigration documentation
and arrangements such as booking flights, as well as catering for medical treatment of crew members.
• Handling the mail of the crew.
• Handling the amount of cash required by the master of the ship (Cash to
Master – CTM).
• Preparing the statement of facts; this is a record of events occurring
during a ship’s port call that can affect the counting of laytime and forwarding it to the shipowner upon the ship’s departure (see chapter 15).
• Undertaking the payment of ship’s expenses at the port, preparing the
disbursements account (D/A) and submitting it to the shipowner.
3.5.3 Liner agents
Liner agents form an important group of intermediaries in liner shipping. Whereas
brokers and port agents seldom enter into written contracts with their principals,
liner agents often enter into long-­term written agreements. There are even some
standard liner agency contracts in the market practice.
Liner agents may be employed as a shipowner’s/­liner operator’s branch office
at the port-­of-­call soliciting cargoes on behalf of the line, typically within a
defined geographical area. The agent may be independent and represent more
than one principal, but in many cases he is tied to, or is often a subsidiary of, one
specific principal.5 Normally, the liner agent involved in a booking deal will get
an amount corresponding to 3–5% of the gross freight.
5 FONASBA (2012) The Role, Responsibilities and Obligations of the Ship Agent in the International Transport Chain.
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Chartering information
The liner agent arranges on behalf of the liner operator services relevant to the
ship and its cargo, such as:
• Securing cargo for the liner operator. This requires from the agent to
be in regular contact with local shippers and be ready to provide information on vessel schedules, competitive rates and conditions of carriage. The booking will normally be made without special negotiations,
through a quotation in accordance with the pricing scheme in force. As
soon as the booking has been noted and confirmed by the agent, there is
an agreement on the carriage of goods and a booking note is normally
issued (see appendix 11).
• Booking up with or without the authorisation from the operator. The
agent will normally have from the liner operator – before every loading
occasion – an allocation of space for booking up without any further
authorisation from the owner. However, for certain cargoes such as unusual goods (heavy lifts etc.), approval must be obtained from the liner
operator in every single case.
• Ensuring the cargo is at the right place and time. The liner agent undertakes also to ensure that the cargo is available at the right place and
time and makes arrangements for it to be loaded and – in the case of an
inbound ship – ensures that the cargo is delivered to the correct consignees. He undertakes the co-­ordination of delivery of inward shipments
and of receipt of outward shipments, keeping close contact with the
liner operator, the terminal and port vendors, as well as with other transport operators (truck operators, rail operators etc.). In addition, liner
agents have to make their utmost effort in each port of call to expedite
the despatch, so that the vessel keeps to her schedule.
• Checking documentation. Since every item of cargo generates the need
for paperwork, the liner agent undertakes also to check the documentation (e.g. booking note, bill of lading etc.).
• Arranging container tracking and control. The procedure of container
tracking and control is an important element of the liner agent’s duties.
Container tracking is to monitor the status and location of every container within the agent’s territory. Container control is the function of
ensuring, in collaboration with the principal, that containers are where
they are needed.
• Settling the proper supply of containers’ seals, labels, numbering and
documents.
• Undertaking the arrangement of tasks related to containers’ maintenance in accordance with the guidelines of liner operator.
• Undertaking services related to inland transportation, customs clearance and other services.
• Keeping shippers advised of vessel’s schedule, cargoes’ status etc.
• Arranging marketing and sales matters. Liner agent deals with the day-­
to-­day contacts with the customers and is always trying to create new
clientele. Therefore, it is routine to travel and to visit customers. Great
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Chartering information
emphasis is given on making marketing research, providing periodical
market analysis, as well as placing advertisements in trade magazines
and daily newspapers. Additional advertising may be carried out from
time to time through big advertising campaigns.
• Undertaking financial matters, such as the collection of money from
shippers and the payment of various expenses on behalf of the vessel.
• Arranging operational tasks, such as ship’s repairing, ship’s provision
with stores, spares and lubricants, ship’s bunkering. Furthermore, he
undertakes crew changes and medical matters.
• Settling various claims in accordance with the instructions of the liner
operator.
Finally, the case of chartered vessels must be commented. When vessels serving a line have been chartered-­in from independent owners, then the ship (i.e. the
owners) may also use the liner agency network for their own purposes, even
though such agents are appointed by the charterer (liner operator).
3.5.4 Forwarding agents (freight forwarders)
In the liner market forwarding agents (or freight forwarders) play an important
role in creating the contract of carriage between the shipowner (carrier) and the
cargo owner. The freight forwarder is the person or company that organises shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer or final point of distribution. The forwarder does not
move the goods, but acts as an expert in the logistics network. In other words, the
freight forwarder arranges for the carriage of goods and associated formalities on
behalf of a shipper. Therefore, he undertakes the booking of space onboard the
vessel, the provision of the necessary documentation, the arrangement of customs clearance etc.
The changing structure of modern liner business has brought about increasing co-­operation among the various carriers (various transport mode providers,
including ships, airplanes, trucks and railroads) involved in cargo carriage from
the seller to the buyer. Thus, large freight forwarders often offer “through carriage”, performing as carriers throughout the whole cargo transit. In liner traffic,
there is a growing tendency for freight forwarders to establish themselves as
logistics companies taking over responsibility for all their customers’ transports
needs and other ancillary services (e.g. warehousing).
International freight forwarders typically perform activities pertaining to international shipments. They have additional expertise in preparing and processing
customs documentation.
3.6 Means of communication
People engaged in day-­to-­day chartering work have to use various technical
means of communication. The shipping community has been quick to adopt and
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Chartering information
gear up with modern IT tools and techniques although the telephone remains the
most popular means. Telex was a very safe method of communication exchange,
but has been replaced by chat forums and today’s social media. Although the
internet, Skype and e-­mail are fully adopted for day-­to-­day shipping communication, as well as for marketing via, for example, websites, the safety factors and
the legal implications still remain to be fully defined and ascertained.
In the shipowner’s chartering and marketing departments as well as at the brokers’ offices, new chartering opportunities, the present state of the market and
shipping developments are always discussed on the basis of the daily inflow of
information. Face-­to-­face contact is so important that chartering and shipbroking
people working for the same or adjacent market sectors often prefer to be seated
in the same room, although the environment may be very noisy from time to time.
As mentioned above, the telephone (facilitated by mobiles) is the most frequently
used medium for daily discussions with intermediaries and principals, so negotiations are frequently carried out over this instrument. Information about orders,
position lists, market reports and various other matters are primarily received by
e-­mail, which is also widely used during the negotiations. Shipping documents,
letters and signed charterparties are, of course, distributed by post mail. At this
point it should be mentioned that various forms of electronic trade are nowadays
applied to a broad field of shipping activities, which include chartering negotiation, charterparty editing (e.g. BIMCO Idea), issuance of shipping documents
(e.g. bills of lading issued through EDI systems in liner shipping), the follow-­up
of ship’s movements, the communication of ship with manager’s/­shipowner’s
office and the charterer, the general flow of information, the advertising of sea
transport services, the support of the shipowner’s or carrier’s client (charterer/­
shipper/­freight forwarder), as well as the electronic payments.6
Irrespective of how sophisticated all communication means are, the old truth
prevails, that the quality of the input determines the quality of the output in all
information systems.
3.7 Information flow and time factor
In a shipping company which operates ships worldwide, the chartering work
may continue day and night because of the time differences between various
countries. It is important to remember that, due to competition, both owners and
charterers can normally choose among a number of alternative business partners.
These may also be domiciled at diametrically opposite places on Earth.
During negotiations every offer and counter-­offer is submitted with a time
limit for reply within which the party offering or countering is committed. If no
reply from the counter-­party is received within the time allowed, then the first
party is free to start firm negotiations with any other party. The time for reply
is often short, that is, anything from immediate reply up to a couple of hours.
6 Plomaritou, E. (2008) Marketing of Shipping Companies (Athens, Stamoulis Publications,
p. 84).
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Chartering information
Normally, the parties try to avoid staying firmly committed overnight or over a
weekend. In a business opportunity where firm negotiations have started, the parties would normally try to conclude without interruptions, at least the main terms.
In bulk shipping, it is quite impossible to judge the tonnage position and foresee the alternative chartering opportunities during a period of time that lays a
couple of months ahead. Therefore, it is not unusual to work with various notice
time renewals lasting for as long as six months after the fixture.
In liner shipping, the lines do not normally alter their pricing tables without
a pre-­notice. However, when they give freight quotations a long time ahead of
shipment, they possibly make a reservation (disclaimer) that any price changes
may arise at short notice because of unforeseen circumstances.
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CHAPTER 4
Chartering business and ship management
This chapter aims to track the location of chartering within the ship management field. It first introduces some general aspects of shipowning, describing
various structures of shipping group organisation and how those may be related
with chartering and shipbroking matters. Then, the ship management function
is defined and the difference with shipowning is discussed. Ship management
services and types of managerial models are presented. Not only the importance
of commercial management of vessels, but also the relation with chartering and
shipbroking practice, is highlighted. Emphasis is placed on showing some of the
owners’ and managers’ most critical commercial decisions, most of all seen from
a chartering perspective. Finally, it is worth reading an example illustrating how
an owner may evaluate the routing plan and the chartering alternatives for one
of his vessels.
4.1 Ship ownership
In a legal and strict interpretation, a shipowner is the person, either a physical
presence or a legal entity, which holds the ownership of the vessel. However, in
a broader sense, shipowning may sometimes be interpreted as comprising also
the ship management/­operation function, apart from pure ship ownership. This
is so, because it is very common for both the shipowning and ship managing
companies to belong to the same shipping group. Moreover, from a chartering
and shipbroking perspective, it is important to note that the term “shipowner”
describes the contracting party which represents the vessel’s interests in a charterparty, either on a voyage or a period charter.
There is a wide variety of shipowners. Some owners operate a single ship
while others larger fleets. Some concentrate on ships of a particular type ( fleet
specialisation), while others operate a varied collection of vessels ( fleet diversification). The type of vessel’s employment (spot or period charters) depends
upon the market’s circumstances, the shipowner’s intentions, expectations and
policies, as well as social and international geopolitical forces. Whilst in bulk
shipping single-vessel shipowning companies form the international rule of ship
ownership, in liner shipping the need for cost minimisation requires co-­operation
among operators and results in the pooling of shipping resources and common
ownership or management of vessels.1
1 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 349–363).
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Business confidentiality and difficulty in lifting the “corporate veil”2 of a shipping company are two good motives for the creation of “single-vessel shipowning companies” structure. Tax avoidance and cost control are the reasons why
most shipowning companies are offshore. Current managerial trends are towards
more transparency in organisational structures of shipping groups (e.g. holding
companies, corporate structures and public shipping companies are more common now than in the past, audited financial statements of the shipping groups are
now the standard business practice, etc.).
A modern shipping group activating in the ocean-­going market would possibly comprise, for example, as many offshore, single-vessel shipowning companies as the vessels of the group are, with each vessel belonging to a separate,
special purpose, shipowning company. Besides, the group would include one
owned ship management company managing the vessels of the group, as well
as presumably a holding company owning the shares of the shipowning companies. This holding company of the group might be listed to an international stock
exchange (e.g. NYSE, Nasdaq, AIM). Within the shipping group there may be
any other companies, relevant (or not) to the shipping activities of the sponsor
(shipowner), for example cash management companies, investment “vehicles”,
real estate companies etc. Private (i.e. not listed) shipping groups may select to
issue audited consolidated or combined financial statements, but they are not
obliged to do so. However, there is an obligation on the publicly listed companies
to publish audited accounts.
The concept of who a shipowner is has greatly changed over the years. Nowadays, several different types of company structures are used, including sole
proprietorship, partnerships (e.g. Master Limited Partnerships – MLPs) and corporate structures. Within the bulk and liner shipping industries there are many
different types of business, each with its own distinctive organisational structure,
commercial aims and strategic objectives. Stopford M. gives some enlightening
examples of typical shipping group structures, which have been slightly altered
or expanded in this text to illustrate also possible differences on chartering/­
shipbroking matters, as follows3:
• Private bulk shipping group: A shipping group of companies owned by
two Greek brothers. They operate a fleet of five ships, three product
tankers and two small bulk carriers trading worldwide. The group has a
small office in London, run by a chartering manager. Its main office is in
Athens, where a few individuals facilitate the accounts and the administration. The three product tankers are on time charters and the two
bulkers are on the spot market. One of the brothers is now more or less
retired and all the important decisions are taken by the other brother,
2 Under most legal jurisdictions it is difficult to break the independence of the legal entity of a
company, thus proving for example that two or more ships and their owning companies belong to the
same shipping group/­shipowner.
3 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
p. 86).
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who knows from experience that the real profits are made from buying
and selling ships, rather than from trading them on the charter market. Ships are fixed through a few competitive shipbrokers with whom
long-­established relationships of trust exist. Ship agents are selected in
each port of call on a case-by-case basis. As bulk carriers are chartered
on the spot market, clients (charterers and shippers) are dispersed and
located worldwide, whereas various standard voyage charterparty forms
are used depending mostly on the cargo carried. On the other hand, the
tanker vessels are sought to get employed on time charters, thus clientele is smaller in number, more specific and concentrated around few
charterers which typically use their own charter forms.
• Shipping corporate: A liner company in the container business. The
company operates a fleet of 20 containerships (ten owned and ten
­chartered-­in from independent owners) from a large modern office
block, housing about 1,000 staff. All major decisions are taken by the
main board, which consists of 12 executive board members along with
representatives of major stockholders. In addition to the head office,
the company runs an extensive network of local offices and agencies,
owned or working on an “exclusive” basis, which look after their affairs
in the various ports worldwide. The head office has large departments
dealing with ship operations, marketing, documentation, secretariat, personnel and legal. In total the company has 3,500 people on its payroll,
2,000 shore staff and 1,500 sea staff. Ship’s space and cargo transport
are booked by shippers or freight forwarders through the liner agency
network of the company. Such agreements are confirmed by documents
called “booking notes”. Liner shipping clients are numerous and widely
dispersed worldwide, whilst cargoes are carried on the basis of various
bill of lading forms.
• Shipping division: The shipping division of an international oil company. The company has a policy of transporting 30% of its oil shipments
in company-­owned vessels. The division is responsible for the acquisition and operation of these vessels. There is a divisional board, responsible for day-­to-­day decisions, but major decisions about the sale and
purchase of ships or any strategic matters must be approved by the main
board. Any items of capital expenditure in excess of $2 million must
have main board approval. Currently, the division is operating a fleet of
ten VLCCs and 36 small tankers. As long as the company serves 70%
of its transport needs by chartered-­in vessels, the shipping division has
established an in-­house chartering/­shipbroking team, so as to secure that
their cargoes are shipped on modern, well-­maintained ships belonging
to first-­class independent owners. An absolute condition of co-­operation
is for the chartered-­in vessels to pass the company’s strict vetting process. The division has a freedom to decide whether to charter vessels on
the spot market or on period charters depending on company’s needs,
market view and prevailing conditions. The company has established
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Chartering business and ship management
and always uses its own standard charterparty forms (voyage and time
charter).
• Public diversified shipping group: A holding company with a fleet of
more than 60 ships of different types and sizes, owned by a respective
number of single-­vessel shipowning subsidiaries. Financial matters are
managed from its head office in New York, though technical management, manning, operations and chartering are carried out from offices in
other more cost-­effective locations. The company is quoted on the New
York Stock Exchange and the majority of shares are owned by institutional investors, so its financial and managerial performance is closely
followed by investment analysts who specialise in shipping. In recent
years the problems of operating in the highly cyclical shipping market have resulted in strenuous efforts to diversify into other activities.
Recently the company was the subject of a major takeover bid, which
was successfully resisted, but management is under constant pressure
to increase the return on capital employed in the business. Ships are
chartered through a combination of both in-­house and competitive shipbrokers. Ship agents are selected in each port of call on a case-by-case
basis. The group has developed an advanced credit control system evaluating the creditworthiness of its clients, thus in all markets of activation it shows a preference in working with reliable, first-­class charterers,
typically established names, located worldwide. Vessels are chartered
either spot or on period charters, depending on market opportunities
and prospects. The in-­house chartering and legal division has obtained
a high and wide experience in using the most suitable standard charterparty forms, depending on the situation.
• Semi-­public shipping group: A Scandinavian shipping group started
by a Norwegian who purchased small tankers in the early 1920s.
Although the holding company is quoted on the Stock Exchange, the
family still owns a controlling interest in that. Since the Second World
War the group has followed a strategy of progressively moving into
more sophisticated markets. Thus, apart from oil tankers, it is involved
with the ownership of container vessels and the carriage of specialist
bulk cargoes, such as motor vehicles and forest products, in both of
which markets it has a sizeable ownership market share and a reputation for quality and reliability of the transport service provided. To
improve managerial control and investment prospects the tanker business was floated as a separate company. The group runs a large fleet of
modern merchant ships designed to give operating performance. It is
based in an Oslo office with a sizeable staff. All vessels, activating in
different markets, are sought to secure time charters or other forms of
long-­term employment (e.g. bareboat, CoA), with first-­class charterers
and for long durations, particularly on periods of strong freight markets.
This matches with the relatively conservative profile of the group as it
increases its cashflow “visibility” and “stability”. Clients (charterers) of
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C hartering business and ship management
the group are relatively few, but co-­operating as long-­standing partners
in all markets of activity. NYPE, Gentime or other more specialised
time charterparties are used for the containerships and specialised vessels of the fleet, whilst charterers’ forms are preferred for the tankers.
The group has one small, in-­house, broking team for each market segment of activation.
4.2 Ship management
Ship management is a different function than the ship ownership and this may
become clear by a definition.
4.2.1 Ship management definition
According to Willingale M., “ship management is the professional supply of a
single or range of services by a management company separate from the vessel’s
ownership”.
“Professional supply” means that the ship manager provides services to the
shipowner according to contracted terms and in return for a remuneration called
“management fee”. In doing so the ship manager is required to ensure that the vessel always complies with international rules and regulations, is run in a safe, cost-­
efficient and profitable manner without threat to the environment and is properly
maintained so as to be seaworthy and preserve as far as possible its asset value.4
Ship management involves crucial tasks such as manning, training and
appointment of both ship and shore-­based personnel, advice on most suitable
type of vessel to be purchased and method of financing, provisions of ship’s
supplies and stores, advice on the available options of ship’s registration, trading,
operations and commercial employment, maintenance etc.5 Thus, “a single or a
range of services” describes a comprehensive range or just one service offered
by the ship manager to the shipowner. These services break down into some
main and typical groups, such as the technical management, the crew management,
the commercial management (chartering and post-­fixture) and the ancillary
services.6 The way in which these management services are dealt with and how
they are grouped together differs extensively.
All these managerial activities are provided either by a managing company
within the shipping group of the shipowner or may be transferred (synonyms:
outsourced, contracted-­out) to specialised companies so-­called “third-­party ship
management companies”. Such companies primarily become involved in the
efficient manning, chartering and maintenance/­repair of ships.7 Outsourcing of
4 Willingale, M. (1998) Ship Management (London, LLP Publishing, 3rd edition, pp. 11–14).
5 Branch, A. and Robarts, M. (2014) Branch’s Elements of Shipping (London, Routledge, 9th
edition, p. 291).
6 Willingale, M. (1998) Ship Management (London, LLP Publishing, 3rd edition, p. 11).
7 Branch, A. and Robarts, M. (2014) Branch’s Elements of Shipping (London, Routledge, 9th
edition, p. 291).
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Chartering business and ship management
ship management provides the shipping companies with opportunities to focus
on core competencies, to access best management practices and to increase competitiveness in implementing new technologies.8
“Management company separate from the vessel’s ownership” means that the
managing company is a different legal entity from the shipowning company. In
cases of third-­party ship management, the offices of the management company
may be located several thousand miles away from where the shipowner is domiciled and in a completely different time zone to where the vessel in question normally trades. In such cases, there is no common shareholding interest between the
shipowner and the manager. In practice, however, common shareholding interests exist in many instances, where ship management and shipowning companies
belong to the same shipping group. In every case the manager (ship management
company) will function as a separate cost centre and will provide equitable services to all clients (shipowning companies) according to a well-defined contract
and detailed budget agreed between the two main contracting parties.
The contract signed between a shipowner and a ship manager (even if both
belong to the same shipping group) is called “ship management agreement ”.
One of the best known and most used ship management contracts is the BIMCO
standard ship management agreement, known as Shipman 2009 (see appendix
15). It concerns a typical contract that can then be amended as needed to fit the
unique requirements of each completed ship management agreement.
4.2.2 Ship management services
Ship management is an umbrella term encompassing miscellaneous types of services. These are typically grouped as technical management, crew management
(manning), commercial management and ancillary services (see Table 4.1). Chartering is a crucial service element of commercial management, affecting both the
revenues earned and the cost structures of a ship. On the other hand, technical
management, manning and ancillary services are extremely important managerial
aspects when controlling the ship costs, specifically the most important category
of the so-­called operating expenses (“opex”) of a ship. “Operating” or “running”
costs (e.g. crewing, insurance, maintenance and repair etc.) form one out of the
two fixed cost categories in managing a ship, the other one being the capital
expenses (“capex”), e.g. the loan instalments and the interest payments arising
from the acquisition of a vessel through debt. The last major ship cost category is
that comprising the variable cost elements9, such as bunkers, port and canal dues
etc. The ship cost structure and the allocation of expenses between the shipowner
and the charterer in various types of charter is presented in section 7.4. It is
worth noting that ship management decisions finally affect the earning capability
of vessels, their cost structure and levels, as well as the quality of the transport
8 Cariou, P. and Wolff, F.-C. (2011) “Ship-­owners’ Decision to Outsource Vessel Management”
Transport Reviews 31(6), 709–724.
9 Variable costs are those depending on the voyage executed, whilst fixed costs are running daily
irrespective of the vessel’s employment.
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Table 4.1 Ship Management Services
Service
Group
Technical
Management
Crew
Management
Commercial
Management
Ancillary
Service
Elements
Maintenance/Repair
Selection/
Engagement
Marketing/
Advertising
Consultancy
Inspection
Manning Levels
Voyage Estimating
Insurance of
Vessels
Budgeting
Certification Control
Chartering
Legal/Claims
Purchasing
(Spares/Stores)
Performance
Appraisal
Operations/
Bunkering
Financial
Performance
Monitoring
Payroll
Post-­Fixture
Audit
Reporting
Travel
Freight/Hire
Collection
Safety & Quality
(S&Q)
Welfare
Laytime
Calculating
Drydocking
Drugs and Alcohol
Disbursements
Certification
Training
Accounting/
Payments
Emergency
Contingency
Insurance of Crew
Master General
Account (MGA)
Insurance of
Machinery
Reporting
Shipbroking/
Agency
Investment/
Disinvestment
Source: Willingale M. (1998) Ship Management (London, LLP Publishing, 3rd edition, p. 16), adjusted by
E. ­Plomaritou and A. Papadopoulos.
services provided, thus such decisions are so crucial in forming the profitability
margins of a shipping company and its market profile.
The management services are analysed in the following sections.
4.2.2.1 Technical management services
The primary objective of technical management is to provide all the services
required to ensure the safe, environmentally friendly and cost-­efficient vessel
operation in accordance with the international rules and regulations. Technical
management has to do with the proper maintenance and repair of a ship and is
sub-­divided into various service elements which are related to10:
• The supply and provision of all stores, spares, lubricants, chemicals and
other miscellaneous products which are required by a vessel on a day-­
to-­day basis in order to be maintained in a seaworthy and cargoworthy
10 Willingale, M. (1998) Ship Management (London, LLP Publishing, 3rd edition, pp. 14–23).
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Chartering business and ship management
condition, together with the inventory control and the control of suppliers. Additionally, stores department cares for the adequate supplies of
various special foods in order to satisfy different crew nationalities with
different eating habits.
• The inspection of the vessel through regular visits of the superintendent
on board, in order to monitor the level of vessel’s maintenance and operating performance, the technical condition of the ship’s structure and
equipment, to ensure the ship’s staff compliance with company policies
and to assist ship’s staff resolve any technical and operational problems.
• The repair of a vessel or its drydocking which includes the pre-­docking
activities, such as the preparation of the drydock work lists, assessment
of the selection criteria of a repair yard (including quality, price, terms of
payment, delivery and redelivery costs), as well as the drydocking activities, such as the management of drydock operation, the assessment of any
unbudgeted items or services and the approval of the work carried out.
Repair and maintenance costs may concern on the one hand scheduled repairs
such as routine onboard works or programmed drydocks and on the other hand
unscheduled, major or minor, repairs. Stores and Supplies costs may concern a
great variety of items, such as marine and deck stores (e.g. paints, ropes, safety
equipment and clothing etc.), engine room stores (e.g. greases, gases, electrical
items etc.), steward’s stores (e.g. cleaning equipment and materials, clothing, galley and laundry supplies, recreational items etc.), as well as lubricating oils (lubes),
which is the dominant cost component in this category. In a typical ship operating
cost profile, repair and maintenance costs, including an allowance for intermediate
and special surveys, account for 15–20% of total operating costs. Stores, spares
and lubricants typically account for another 20–25% of total operating costs. It has
been ascertained that in periods of weak freight rates, as for example the dry bulk
market in 2009–2016, owners possibly postpone the maintenance of their vessels.
This combined with excess availability of repair capacity lead in maintenance and
repair costs being kept at relatively low levels in periods of depressed markets.11
4.2.2.2 Crew management services
The primary objective of crew management is the provision of well-­trained and
suitably experienced crew of the nationality required by the shipowner to a vessel,
so as to ensure safe, efficient and economical operation according to international
regulations. Crew management is made up of different service elements such as:
• Crew selection which includes the management of large amounts of
data concerning seamen’s records and application forms.
• Liaison between different persons who are involved in the sourcing of
sea staff at various locations, typically the master, the crew manager and
11 Drewry Maritime Research Ship Operating Costs 2015/16 Annual Review and Forecast
(November 2015, pp. 15, 53 and 61).
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C hartering business and ship management
•
•
•
•
the recruitment officer, as well as other interested parties (port agents,
medical practitioners etc.).
Assessment of sea staff performance during their period of employment and policies for the avoidance of human error. Human error can
be reduced by increasing communication, training, fatigue management
and by eliminating the causes or the conditions which induce human
error, e.g. improved shore-­based management could decrease the commercial pressure of the seafarers.
Crew training and career development.
Control of drugs and alcohol.
Medical matters.
Apart from crew wages and various forms of extras (e.g. overtime), manning
costs typically include also victualling and travel/­repatriation expenses. All are
affected by external factors such as crew nationality and the trading status of
the ship. Manning accounts for 35–40% of total ship operating costs, therefore
having a major impact on ship management.12
4.2.2.3 Commercial and operational management services
Chartering and shipbroking have a direct relation with the commercial management of vessels. This group involves the provision of ship management services
for the employment of a vessel, such as:
• Pre-­fixture services, provided during the stages of chartering investigation and negotiation (see chapter 8). Evaluation of chartering alternatives is generally called “voyage estimation” and is also included at this
category of services (see chapter 14 for voyage estimation analysis).
• Fixture services, provided during the stage of the fixture of a charter.
Typically, the commercial manager, after the negotiation of the required
terms and conditions, undertakes to finalise and sign the agreed charterparty, representing the ship’s/­shipowner’s interests in the agreement
(see chapters 7, 9–13).
• Operational (post-­fixture) services, provided during the execution of the
charter. Once the vessel’s employment has been determined, the commercial manager instructs the ship’s master accordingly for the execution of the charter. Operational management ensures that the ship carries
out the tasks to which it has been committed by the commercial people who arranged employment through chartering brokers. Operational
post-­fixture management is composed of critical service elements, such
as bunker management, appointment of port agents and advice for their
actions as concern as the vessel, the monitoring of income collection
(freight, hire, demurrage, other), the maintenance of vessels accounts,
12 Drewry Maritime Research Ship Operating Costs 2015/16 Annual Review and Forecast
(November 2015, pp. 12, 24).
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Chartering business and ship management
the checking of invoices (“disbursements” or “D/As” in short), the resolution of any disputes involving the charter, as well as specialist matters
which must be accomplished in liaison with other departments (e.g. the
drydocking of a vessel, an accident). This group of services comprises
also the laytime calculation, a crucial, post-­fixture process of high practical, commercial and legal importance, closely related to the chartering
and shipbroking business (see analytically chapter 15).
• Marketing services, provided during the marketing implementation process (see analytically chapter 5). Marketing is a tool for the improvement of chartering policy and thus it constitutes a means helping to
increase the shipping company’s profitability and customer retention.
• Services related to the purchase of a ship (second hand or newbuilding),
the sale of a ship (scrap or second hand), the lay-­up of a ship etc.
Shipowners may sometimes sub-­contract all the management of their ships
with the exception of the actual arranging of the ships’ commercial management.
In these cases, the contact with brokers, the fixing of charter and the marketing
process all remain under the owner’s total control.
4.2.2.4 Ancillary management services
This group of services is mainly focused on the management of financial matters
(e.g. advice on the publication of financial accounts or monitoring of the credit
risk of prospective charterers), as well as on the management of special technical
projects (e.g. consulting for the construction of a newbuilding vessel or a ship
conversion and monitoring the relevant works).
Furthermore, insurance services may be handled by a ship management company. Insurance for ships generally falls into two major categories; the insurance
against loss or damage to the ship itself known as “Hull & Machinery (H&M)
insurance” and the insurance for claims made against the ship by other persons
or companies (third parties), such insurance broadly known as “Protection and
Indemnity (P&I) Club insurance”. These two elements normally account for
about 90% of insurance costs, with the remaining expenses to concern war risk,
freight demurrage and defense (FD&D) etc. Insurance costs typically account for
8–10% of total ship operating costs.13
In this category of ancillary services some other kinds may also be included,
such as handling of legal claims or auditing of financial accounts.
4.2.3 Ship management models
The above-mentioned analysis does not reflect the complexity of the relationship which often exists between the shipowner and the ship manager. The following sections describe shortly the most significant types of ship management
13 Drewry Maritime Research Ship Operating Costs 2015/16 Annual Review and Forecast
(November 2015, pp. 15, 38).
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C hartering business and ship management
models. One fundamental consideration is the choice between keeping the
management (mostly technical and crew) in-­house or outsourcing to an independent, third-­party ship manager. However, the selection is not solely related
with cost. It depends on how much decision-­making the owner is prepared
to concede. In other words, it takes on a strategic risk and an evaluation of
counter-­party risk.14
4.2.3.1 Traditional ship management model
This is a fully integrated management system where the owner (i.e. the person
or the group of shipping companies) creates an in-­house management system for
the ship or ships. The owner retains the full responsibility of managing/­operating
the ships and employs personnel to work directly for him. Typically, office and
staff are common for the managing company and the shipowning companies of
the group. There exists an organisational structure to deal on his own with all
aspects of the ships’ operation and management, including meeting the requirements of the ISM Code and achieving the relevant certification for the office and
each ship.15
This is the most common form of ship management because in this case privacy of decision-­making is retained. For this reason, the terms “shipowner” or
“owner” or “shipping company” are often meant to include also the function
of the ship manager. For the sake of simplification and alignment with current
practice, this book uses the word “shipowner” as containing also the role of the
commercial manager or operator of vessels, unless otherwise stated.
4.2.3.2 Outsourcing or third-­party ship management model
This is where the management of the ship is contracted out to a third-­party company. As a result, all the day-­to-­day management of the ships is carried out by a
specialist company. In this model all of the following functions are outsourced:
technical, crewing, operations, commercial (chartering and post-­fixture), accounting and financing, safety and quality. In effect, the management company takes
control of the ship and reports to the owner how this is progressing. The owner
still has the final say, being responsible for funding the operation of the ship and
paying a monthly fee for the services contained in the management contract.
The need for using the services of a third-­party ship manager arises from various causes. Sometimes ships are owned by a group of companies that have combined to fund their purchase but have no shipping knowledge or experience to run
them (e.g. pension or investment funds). Therefore, in many cases, the people,
companies or organisations which own the ships have no expertise in shipping. If
this is the case, the need to find a competent ship management company becomes
extremely important to ensure that there is a return on the investment.16
14 Drewry Maritime Research Ship Operating Costs 2014/15 Annual Review and Forecast
(January 2015, p. 52).
15 Dickie, J.W. (2014) 21st Century Ship Management (London, Bloomsbury Publishing, p. 2).
16 Dickie, J.W. (2014) 21st Century Ship Management (London, Bloomsbury Publishing,
pp. 1–2).
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Chartering business and ship management
Another important reason for using a third-­party ship management company
(apart from lack of expertise) is the cost of managing ships. The complexity
of shipping has progressed and shipping groups have amended their strategy to
respond to new requirements (such as changes in legislation or in safety matters).
In addition, modern communication systems have also changed the way ships are
operated and have implications on the monthly budget of a shipping company.
To meet these challenges, the shipowning companies may decide to co-­operate
with third-­party ship management companies with a large number of ships under
their care, which can deliver cost-­effective management services comparing with
the self-­owned managing companies which form part of smaller private shipping
groups.
If a shipowner has very few ships, the cost to be allocated against each ship
to cover the in-­house management function becomes uneconomical. This is not
the problem in large fleets as the management costs are spread over more units.
The owner of a small fleet, apart from the obvious solution of buying more ships,
may employ the services of independent ship management companies in order
to reduce operating costs. These companies contain all departments needed to
provide an efficient service, charging a fee for that. Because of their size they
may be able to attract top-­class executives or have best access to crew and the
large numbers of ships under their management enable them to enjoy economies
of scale. In this case, the shipowner may agree to have the “final word” on how
his ships are used or may let that decision to the managing company. Last but not
least, the shipowner will be the ultimate beneficiary of the net income generated
by each ship.
There is a dilemma for the medium sized shipowner who will have to consider
the benefits of using his own staff over which he has direct control, balancing
this against the economies in using a third party to manage his ships. Sometimes
that problem is solved by sub-­contracting only parts of the total management
function (see section 4.2.3.3). This is possible in case of a clear demarcation of
different business activities in ship management. Moreover, the medium sized
shipowner has another choice to successfully overcome the lack of economies
of scale. That is, contracting to manage ships belonging to other owners, by his
personnel which in any case is employed to run his own vessels.
In conclusion, there can be many reasons why a shipowner may select to outsource the ship management. More specifically17:
• Cost savings (overheads reduced by an economy of scale).
• Flexibility of investment (allows the freedom and provides opportunities to invest, divest or diversify or any combination of them).
• Benchmarking (it is easier to evaluate how well and cost-­effectively the
ship is operated).
17 Dickie, J.W. (2014) 21st Century Ship Management (London, Bloomsbury Publishing, p. 3);
Branch, A. and Robarts, M. (2014) Branch’s Elements of Shipping (London, Routledge, 9th edition,
p. 291); Cariou, P. and Wolff, F.-C. (2011) “Ship-­owners’ Decision to Outsource Vessel Management”
Transport Reviews 31(6), 709–724.
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C hartering business and ship management
• Compliance to international maritime laws and regulatory measures
(reducing the problems of legislative demands and the resources needed
to meet them).
• No in-­house expertise to operate the ships (this may be because the shipowner has no experience of managing ships).
• Settlement of operational matters (the management company ensures
that daily operation and maintenance of the vessel are correctly
superintended).
• Improvement of quality and reliability of services.
• Increase of speed and flexibility of services.
4.2.3.3 Hybrid ship management model
In this case there is a partial outsourcing of the functions from the owner to the
management company. Spruyt illustrates this complexity by providing a number
of specific examples of what can be described as hybrid shipowner–ship manager
relationships. These include situations where18:
1. The shipowner retains control over a number of critical functions in
the management of his ships, including, for example the selection of
senior ship officers, safety auditing, the negotiation and management
of drydockings etc., while outsourcing the remaining day-­to-­day ship
management activities.
2. The shipowner retains a technical department to run a “core” fleet
(e.g. bulk carriers), but in acquiring a fleet of specialist vessels such
as chemical tankers, uses a ship manager that is able to provide the
appropriate technical management, including the maintenance of tank
coatings, the sourcing of skilled and experienced crew relevant to the
ships in question etc.
3. The shipowner does not have the in-­house staff to handle a sudden
increase in his fleet, perhaps via an opportunistic purchase. In this case
a ship manager will be used only until the shipowner recruits extra personnel to cope with the additional workload.
4. A ship manager has a shareholding position in a vessel under management or has some kind of equity association with the shipowner.
Consequently, a shipowner may manage his entire group of companies or
sub-­contract all or some parts, such as ship operation or crewing or commercial
or technical management to other companies. In special cases, he may almost
sub-­contract even the “ownership” of the ship by making a bareboat charter,
known also as “demise charter” (see chapter 13). In this charter type the charterer is called “quasi-­owner” as undertaking fully the responsibility for vessel’s
operation and commercial employment. It must be emphasised that the risk of a
18 Spruyt, J. (1994) Ship Management (London, LLP Publishing).
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Chartering business and ship management
bareboat charter is extremely high for the shipowner, as long as severe problems
may be faced by him even though they were caused by bad ship operation and
insolvency from the bareboat charterer.
4.3 Importance of commercial management
In previous sections an attempt was made to locate the position of chartering within the field of ship management. From the above-mentioned analysis
it was inferred that chartering business forms a significant part of commercial
management.
It is known that the main parties involved in the chartering business are the
shipowner, the charterer and the shipbroker. The shipowner executes a cargo
transport by his vessel or gives the vessel for hire (in order to carry cargoes by
sea), the charterer needs that vessel either because he has or he may find cargoes
for transport, and the brokers act on behalf of the shipowner and the charterer,
bringing together the two parties in order to have a charter deal. The role of
the shipbrokers was described extensively in section 3.5.1, whilst the chartering negotiation procedure will be presented analytically in chapter 8. Types of
charter were briefly discussed in chapter 1, whilst they are analysed further in
chapters 11–13. The following parts of this chapter will focus on some of the
managerial aspects of chartering business, most of all on crucial decision making
examined basically from the operational, day-­by-­day viewpoint, as well as on
showing why commercial management and therefore chartering are so important
for the success of a shipping group. The strategic thinking and the chartering
policy formation by the shipowners and the charterers/­shippers are analysed in
chapter 5.
4.3.1 Decision-­making in commercial management
Adequate information and a great deal of flexibility are always required from
companies and organisations engaged in shipping. Apart from the daily fluctuations in freight rate levels and trading conditions, depending on the supply–­
demand situation, there is a constant development towards new techniques in
shipbuilding and propulsion, cargo handling, terminal operations etc. Due to
the ever-­changing conditions in international commerce, the overseas trading
patterns are changing and new cargoes and loading–­discharging areas emerge,
sometimes quite drastically diminishing the importance of previously busy ports
and critical cargo movements. Such changes will occur over periods of a few
years and probably several times during a vessel’s commercial lifespan (typically
20–25 years, although sometimes ships may trade up to 30 years, or even more).
Irrespective of the freight market being booming, flat or depressed, there are
also some seasonal changes in cargo volumes to be shipped. In such a dynamic
commercial environment, shipowners, ship managers, fleet operators, charterers
and shippers, shipbrokers and agents have to be able to take advantage of new
opportunities so as to survive and remain competitive.
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C hartering business and ship management
In order to maintain maximum flexibility on a daily and a long-­term basis,
thereby staying safe and sound economically, shipowners may decide to renew
their fleets when they consider that conditions are favourable. Shipowners operate the number, type and size of vessels necessary to meet the requirements of
their chartering contract engagements. They may hire (charter-­in) extra tonnage
whenever their shippers or charterers require, or because of other temporary or
sudden increases in demand for shipping space in the market sectors of participation. This means that an owner who runs a fleet of ships may operate owned
vessels as a more or less permanent base, plus an additional fleet capacity of
chartered-­in tonnage (under time or bareboat charterparties) to suit the market
and customer requirements over a period of time. He may further operate supplementary tonnage chartered on a spot basis to meet temporary increases in cargo
offerings or fill unexpected gaps in liner or contract schedules.
Obviously the shipowning business has to do with decision-­making. Crucial
commercial decisions concern ship investment and disinvestment, employment
of vessels and of course the timing of such decisions. Therefore, ship ownership
(as influenced by ship sale and purchase, newbuilding orders and scrapping), as
well as ship management and chartering decisions are of paramount importance
for the entire shipping community. The investment/­
disinvestment decisions,
though of utmost importance for the success of a shipping group, are beyond
the scope of this book. However, in respect of chartering business, owners, ship
operators and managers should be able to make critical commercial decisions;
strategic and operational ones. There is a great variety of day-­by-­day chartering
and ships’ employment decisions. Some indicative examples are seen below:
• Securing employment for owned vessels at the open market by fixing
full or part cargoes on either a voyage-­by-­voyage basis or by long-­term
contract engagements.
• Engaging owned ships in so-­called “industrial shipping” with a charterer, under a chartering contract lasting several years (e.g. time charter,
bareboat, CoA, consecutive voyages charter), with a fleet of ships specially built and equipped to suit the charterer’s needs, and for a transport
service to be offered as an integrated link in the customer’s business
production and distribution chain.
• Chartering-­in tonnage for a longer period (e.g. under a time or a bareboat charterparty) or for a shorter period (e.g. under a trip time charter) to supplement the owned fleet of vessels, intending to satisfy the
expected market requirements, fulfil the chartering/­transport contract
commitments or even keep the standards of a liner service engagement,
generally by obtaining maximum efficiency, economy and customer satisfaction over a period of time.
• Time chartering “out” owned or period-­chartered tonnage to other
owners or ship operators, for longer or shorter periods, against a fixed
daily hire, for those parties to operate the vessels in the open (spot) market or in the liner trades.
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Chartering business and ship management
• In pure liner trades, securing bookings of so-­called “parcels” (typically
smaller consignments of various commodities transported in containers),
intending to fill empty spaces of vessels employed in a liner service, at
fixed itinerary.
4.3.2 Example of vessel routing and chartering alternatives
To explain how difficult, complicated and fast decision-­making could be on commercial management, Figure 4.1 illustrates a hypothetical example presenting an
owner’s possible chartering alternatives about the deployment of one of his vessels, as well as the combinations of cargo and ballast voyages that will be considered and calculated on. A similar evaluation process is always followed by owners
operating cargo vessels in the open market. It is assumed that the ship in question
is a modern “con-­bulker” of 30,000 dwt, able to operate either as a bulk carrier
in tramp (bulk) trades or as a supplementary feeder vessel carrying containers in
smaller liner trades. The vessel is “open” at point A (i.e. having no fixed chartering
commitment). One option would be to let the vessel out for a time charter (T/C)
Figure 4.1 Ship’s Alternative Types of Deployment
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C hartering business and ship management
trip on behalf of a liner company looking for extra tonnage. The owners would
then consider redelivery at point B, or, if the charterers were interested in extending the charter to a full round trip, the vessel would be open again at point A. If in
position B, the next opportunity could be a voyage from D to C. In such a case the
vessel would proceed from B to D in ballast. If in position A, the owners might be
lucky enough to find a cargo available at A for discharge at D, where next a new
cargo might be fixable to C or the vessel would have to ballast from D to E for the
cargo destined to F or another employment to C. These owners might have a long-­
term transport contract running (e.g. a Contract of Affreightment, see chapter 13),
which requires cargoes to be lifted at certain intervals from C for discharge at A.
The ship coming in to C from D or E with cargo, or in ballast from F, could be in
just the right position to lift one of the CoA cargoes. After discharge, the owners
would find this ship open again at position A.
The above is just an example, complicated even before discussing anything
about the earning income (i.e. freight or hire rates) of each chartering alternative.
Imagine then how challenging and demanding it could be in real life conditions.
Evaluation of ship employment alternatives is always the starting point in the
chartering process, and is therefore valuable. Voyage estimation methodology is
analysed in chapter 14.
There are a number of factors that owners have to consider in this continuous scheduling, evaluation and calculation process. The next open position in
lieu of new employment possibilities, as well as the duration of the employment in relation to the freight market outlook are the most prominent factors
to consider in such a decision-­making process. Other crucial questions to ask
could include the following: Is the cargo dirty or of a dangerous nature? Could
this cargo damage the ship’s holds and gear? Is it a well-­known trade with
well-­established chartering routines and clean charterparty clauses, or are
there unknown conditions and risks which cannot be easily pre-­calculated? Are
the charterers reputable in the market and considered as first-­class charterers
(FCC)? Is the ship due for special survey or drydocking, and whereabouts in
the world would it be most economic and appropriate to have this job done?
How this could be programmed among chartering alternatives and other commitments of the vessel?
The owners should also consider fleet optimisation, in other words the efficient
and economical routing of the entire fleet in operation. That means, to minimise the
total ballasting and off-­hire periods and to maximise the total earnings of the group,
by a suitable combination of period contracts and spot market trading, chartering
extra tonnage as and when required. This could include also the investment point
of view, in other words buying or selling ships when needs or opportunities arise.
4.3.3 Commercial management highlights from a chartering business
perspective
From a chartering and shipbroking viewpoint, the importance of commercial
management lies in the fact that it decisively determines the particulars of a
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Chartering business and ship management
vessel’s employment. It is mainly concerned with deciding the type of charter
and the consequent cost allocation between the shipowner and the charterer, the
duration of charter engagement, the freight or hire rate fixed and income earned,
the trading areas and the timing of decisions. Whereas all other day-­to-­day managerial aspects (e.g. crewing, technical, ancillary services etc.) directly affect only
the cost element of managing a ship, commercial management has a direct effect
on both ships’ revenues and costs; thus it influences the profitability of a shipping
company. For example, if a vessel is fixed on a voyage charter, the freight is
paid on a $ per ton of cargo carried basis and the owner bears the voyage costs
(bunkers, port dues etc.), whilst in a time charter revenue is earned on a $ per day
basis and voyage costs are transferred to the charterer. In addition, whereas the
ship’s operating costs (manning, maintenance, insurance etc.) are borne by the
owner on a time charter, they are transferred to the charterer on a bareboat charter
(for the ship cost allocation between the shipowner and the charterer in various
types of charter, see section 7.4). It should be very clear that the choice of charter
affects crucially the financial results of a shipping company.
Another point to remember has to do with the need for recognition of roles
among the “players” within the shipping market. Chartering is about meeting the
cargo transport needs with the vessel employment alternatives on a day-­by-­day
business routine. This matching is always concluded by important documents
such as charterparties and bills of lading. For all participants of the shipping
market it is crucial to be able to recognise the roles and distinctions of others.
When contracting in a shipping document, it is imperative to know who the
counter-­party is, what his role is, what business he serves and which interests
he represents. For example, in a charterparty (voyage or period) the party which
represents the vessel’s interests might possibly be a shipowning or a managing
company (owned or third-­party) or a ship operator. On the contrary, the party
which represents the cargo’s interests in a charterparty or a bill of lading could be
a shipper, a charterer or even a freight forwarder. This is equally important for the
shipbrokers who should know their customers before promoting and representing
them in a chartering negotiation procedure. Knowing well the counter-­party or
the customer helps preventing from problems, as well as better perceiving situations, interpreting business behaviours and understanding how far the responsibility of each contracting party may reach. This is a rather qualitative aspect
of ships’ commercial management playing a great role in chartering and shipbroking matters.
It was seen also in this chapter that differences in shipowning structures and
vessel types operated usually bring about differences to the chartering policy
adopted, as well as to the shipbroking and agency network followed. It is important to note that each market segment has its own structures, persons and peculiarities to handle from a commercial management standpoint.
When making decisions about ship management, the state of the freight market
in relation to the continuous need for cost control are also of high importance.
For example, in periods of depressed freight earnings, shipowners may resist as
much as possible to cost increases seeking ways to cut operating costs. Moreover,
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C hartering business and ship management
another critical point from a chartering perspective is the cost of bunkers. In
periods of low freight levels and high oil prices, an owner could possibly prefer
to time charter a vessel for a relatively short or medium period, thus passing the
high bunkers cost to the charterer, instead of chartering his vessel on the spot
market where such costs are borne by the owner.
Furthermore, commercial management comprises also two basic practical and
calculative aspects of chartering. The first one is done before fixing a ship and
concerns the evaluation of chartering alternatives, the so-­called “voyage estimation” process, which crucially examines the vessel’s profitability (see chapter
14). The second one is about “laytime calculation”, a significant field of chartering as it concerns a complicated, practical matter with serious legal implications.
Laytime is the period of time agreed in a charterparty during which the owner
shall make and keep his vessel available to the charterer for loading or discharging without payment additional to the freight. Laytime is a matter of high importance and often a subject of dispute in chartering practice (see chapter 15).
As a conclusion, it may be said that the commercial management of vessels is
formed from two parts: one operational and the other strategic. The operational
aspect essentially comprises the chartering decisions and the control of income
streams. In this context, shipbroking is the intermediary profession which facilitates chartering business, namely the decisions and procedures about fixing of
vessels. On the other hand, the strategic aspect of commercial management is not
only based on investment and disinvestment decisions (e.g. buying and selling of
ships), but also, from a chartering perspective, on marketing which is considered
a valuable strategic tool for advancing the chartering policy of shipping companies. The next chapter is devoted to that modern instrument of chartering policy
formation.
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CHAPTER 5
Chartering policy and marketing strategy
This chapter goes on analysing further the commercial management of ships.
Marketing is introduced as the strategic tool which helps a shipping company
improve its chartering policy. At first, factors affecting the chartering policy of
charterers, shippers and shipowners in both bulk and liner shipping are discussed.
This is followed by a comprehensive presentation of the marketing principles and
how these may be applied to a shipping company. Finally, various shipping marketing strategies are illustrated through real-­life case studies and commercial
examples.
5.1 Chartering policy of charterers and shippers
In bulk markets a charterer decides to work with a shipowner after considering
a series of selection criteria. Thus, the charterer’s requirements and the determinants of his decision-­making process play a decisive role in the formation
of charterer’s chartering policy. A similar process is followed by a shipper in
the liner market when selecting a carrier to work with. The following sections
present the chartering policy of charterers and shippers in bulk and liner market.
5.1.1 Charterers’ requirements in the liquid bulk (tanker) market
In the tanker market seven categories of criteria have been recognised as playing
a critical role in the charterer’s selection process of a shipowner. These criteria
represent the requirements of charterers in liquid bulk (tanker) markets and are
classified in order of importance as follows1:
1. Compliance of shipping company with the international regulations for
safety management.
This includes, for example:
•
•
•
•
Well-designed and built tankers.
Well-maintained tankers.
Training and competence of crew.
Training and competence of employees.
1 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 127–133); Plomaritou, E. (2006) Marketing of
Shipping Companies (Athens, Stamoulis Publications, in Greek, pp. 216–229).
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Chartering policy and marketing strategy
This criterion is related to the application of international rules and standards
recommended by the International Maritime Organisation (IMO), state authorities (e.g. port state controls) and recognised registers (classification societies),
for avoiding marine accidents, marine pollution, vessels’ and/­or cargoes’ losses
and/­or damages. From the early 1990s, an increasing national and international
concern over tanker safety and environmental aspects was observed, resulting
in new rules and conditions for tanker owners (e.g. US Oil Pollution Act known
as OPA ’90), which affect the market and the marketing of tankers, especially
older vessels. The above-­mentioned rules may refer to the construction, maintenance and trading of ships, as well as to the training of crew and personnel. The
most prominent such example was the IMO single-­hull tanker vessels phase-­out
programme which dictated that all such tankers should have been banned from
international trading up to the end of 2015.
The so-­called “oil majors”, together with a few smaller companies, control a
significant percentage of the production, trading and – particularly – seaborne
transportation of crude oil and refined petroleum products worldwide. The oil
companies, acting as charterers in the market, are specially careful and sensitised
in environmental matters. Accordingly, they have established strict operational
and financial standards that they use to pre-­qualify, or vet, tanker owners prior
to entering into charters. The oil companies require previous inspection of the
tankers they are about to charter, in order to ascertain that they are suitable for
their transportation needs. This investigation process is widely known as the
“vetting” of tankers. Many independent tanker owners believe that it is necessary
for a charterer to know in every detail what he is about to charter. However, some
owners think the above charterers’ stand is excessive, since an extensive inspection has already been carried out on the vessel by the register or by the flag state
or by the port states or the shipping company itself.
Oil companies constantly evaluate the shipping companies they work with, as
well as the quality of the vessels they charter. While numerous factors are considered and evaluated prior to a commercial decision, the “oil majors”, through their
association called “Oil Companies International Marine Forum” or “OCIMF”,2
have developed two basic tools: the Ship Inspection Report programme (SIRE)
and the Tanker Management & Self Assessment programme (TMSA).
The SIRE programme3 was launched in 1993 to provide a standardised tanker
inspection format, with objective reports capable of being shared. The SIRE
Programme is a unique tanker risk assessment tool of value to charterers, ship
operators, terminal operators and government bodies concerned with ship safety.
At the heart of the SIRE system is a large database of objective technical and
operational information about a range of vessels used for carrying oil, gas and
chemicals. This information helps in vetting decisions on vessels ahead of charter, as well as focusing attention on the importance of improvements in vessel
quality and safety. OCIMF member companies commission vessel inspections
2 www.ocimf.org (accessed 5 June 2017).
3 www.ocimf.org/­sire (accessed 5 June 2017).
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Chartering policy and marketing strategy
and appoint an accredited SIRE inspector to conduct an inspection. The inspector
accesses the vessel particulars from the SIRE database along with the appropriate “Vessel or Barge Inspection Questionnaires” (VIQ/BIQ) before carrying out
an on-­board inspection of activities ranging from cargo-handling processes to
the vessel’s pollution prevention measures. The resultant report contributes to
the member company’s risk assessment in advance of charter. The report is also
uploaded to the SIRE database, where, for a nominal fee, it can be accessed by
registered companies who charter tankers or operate terminals. Free access to all
SIRE reports is provided to government agencies engaged in port state control
activities. By establishing a standardised, objective inspection process that systematically examines tanker operations and that is shared by OCIMF members
and other authorised recipients, SIRE has been instrumental in driving up expectations and behaviours relating to chartering, operational and safety standards in
the industry.
The TMSA programme4 was introduced in 2004 as a tool to help vessel operators assess, measure and improve their safety management systems. The programme encourages vessel operators to assess their own safety management
systems against listed key performance indicators (KPIs) and provides best practice guidance on how to attain appropriate standards of safety performance. Vessel operators are encouraged to use their assessment results to develop phased
improvement plans that can be applied, as appropriate, across their entire fleet
and to share feedback with potential charterers via the TMSA database. The
TMSA programme offers a standard framework for assessment of a vessel operator’s safety management systems. The framework is based on 13 elements of
management practice, each one associated with a clear objective and a set of
supporting KPIs to help operators assess the level of attainment in their company.
The 13 elements are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Management, leadership and accountability.
Recruitment and management of shore-­based personnel.
Recruitment and management of vessel personnel.
Reliability and maintenance standards.
Navigational safety.
Cargo, ballast, tank cleaning, bunkering, mooring and anchoring
operations
Management of change.
Incident investigation analysis.
Safety management.
Environmental and energy management.
Emergency preparedness and contingency planning.
Measurement, analysis and improvement.
Maritime security
4 www.ocimf.org/­sire/­about-­tmsa (accessed 3 September 2017).
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Chartering policy and marketing strategy
2. Reputation and image of the shipowner in the shipping market.
This includes, for example:
• Loss and damage track record of shipping company.
• Reputation, experience and reliability of the shipowner.
The oil companies maintain the view that the reliability, honesty and integrity of the shipowner are more important than the most attractive charterparty
terms that may be offered to them. Thus, the oil companies, during the chartering
negotiations, take seriously into account the reputation of the shipping company
within the freight market, the marine insurance market, the sale and purchase
market, the newbuilding market etc. The “track record” or in other words the history of losses and damages of the shipping company crucially affects the decision
process of charterers in making a fixture.
3. Low cost sea transport operations.
For example:
• Transportation solutions that reduce charterers’ costs and maximise
financial results.
In the past the tanker market was characterised by a small number of big
c­ harterers – the oil majors – that largely had the ability to fully control the
oil transport operations. Nowadays, top oil companies may be state-­
owned
(e.g. Saudi Aramco, Rosneft, ADNOC, CNPC, KPC, PDVSA, NNPC),5 state-­
controlled (e.g. Gazprom, Petrobras) or multi-­national companies (e.g. ExxonMobil Corporation, BP P.L.C., Royal Dutch Shell, Chevron Corporation, Total
S.A.), being either publicly traded or private ones. It is worth noting that national
oil companies accounted for 75% of global oil production and controlled 90% of
proven oil reserves in 2010.
In the 1950s it was typical for the big oil companies to own and manage a considerable fleet of tankers. By the end of 1960s the oil companies owned about
36% of the tanker fleet, they time-­chartered another 52% and they topped up their
seasonal requirements from the spot market which accounted for about 12% of
supply.6 Until the 1970s the seven major oil companies, known as the “seven sisters”, were responsible for around 80% of all oil processing in the world and they
operated or controlled, through long-­term charters, most of the seaborne oil transport. In the early 1970s, due to the fact that the oil trade fell sharply and the supply
got out of control, the trend for these companies was to reduce their share as tanker
5 Carpenter, W. (2015) The World’s Biggest State Owned Oil Companies (www.investopedia.
com).
6 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition, p. 436).
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owners or operators and enter into long-­term ship charter engagements of two or
three years. More specifically, 80% of oil tankers owned by independent shipowners were on time charter to oil companies. As a result, independent tanker owners
built vessels to charterers’ specifications and placed them on long-­term charters. In
1990s due to the fact that the oil trade changed from a predictable to a more risky
business, the chartering policy of oil majors changed again and only 20% of tankers
owned by independent shipowners were on time charter to oil companies. It has
been conclusively proven that the policy of oil companies may change rapidly and
continuously in response to the dynamic circumstances in the tanker market.
In the last 30 years the control of oil transport has changed and the role of oil
majors in transport has been diluted. The number of smaller private firms (often
known as “oil traders”) and state organisations engaged in the chartering of tankers increased considerably during the 1980s. Oil producers, especially in the
Middle East, market their oil through distribution organisations in the consuming
markets and several have built their own tanker fleets. New oil companies have
emerged in the rapidly growing Asian markets, with their own transport policies.
Large volumes are now handled by oil traders, some of them working for the oil
companies and others for independent diversified traders. Oil traders own much
of the oil during shipment and since they are constantly buying and selling oil
cargoes, it suits their business model to charter ships as required on a voyage by
voyage basis, and this has encouraged the growth of the spot market.
Within this framework, the freight cost is always important, but the greater the
proportion of freight in the overall cargo cost equation, the more emphasis charterers are likely to place on it. For example, in the 1950s the cost of transporting
a barrel of oil from the Middle East to Europe represented 49% of the CIF cost.
As a result, oil companies devoted great effort to finding ways to reduce the cost
of transport. By the 1990s, the price of oil had increased and the cost of transport
had fallen to just 2.5% of the CIF price, so transport costs became less important.7
4. Appropriate (fair and unselfish) chartering negotiating process.
This includes, for example:
• Compliance with widely accepted chartering negotiation rules.
• Provision of accurate and reliable information regarding the ship.
• Co-­operation and response to charterers’ requirements.
The charterers wish to ensure that appropriate chartering negotiations are followed. This means prompt negotiations with the application of proper negotiation
rules. The negotiating parties should comply with the standards and principles,
as generally proposed by crucial institutions, such as BIMCO, Baltic Exchange,
FONASBA etc. The charterers require from the shipowners to provide true,
7 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
pp. 7–8).
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Chartering policy and marketing strategy
precise and reliable information concerning the vessels. The ship’s description is
of a great importance to the degree it influences the charterer to sign the chartering contract. All information must be exchanged in good faith.
In addition, the charterers require from the shipowners to comply with the time
limits for the submission of offers and counter-­offers (see chapter 8). During negotiations, the parties’ offers and counter-­offers are submitted within logical time
limits. Obviously, aimless delays during chartering negotiations are not desirable.
The shipowner should not offer the same ship to more than one charterer at the
same time, because if all charterers accepted the offers, then the shipowner would
not be able to fulfil his obligations and make his vessel available concurrently.
Sometimes, during the negotiation of a ship the shipowner uses phrases such as
“subject open” or “subject free” or “subject unfixed ”, which means that the ship
is subject to a negotiation with more than one charterer at the same time. However, such a tactic is not desirable from the charterer.
5. Provision of high quality transport services.
This includes, for example:
• Safe transportation of cargo to its destination. No cargo loss or damage.
No claims.
• Trade and schedule flexibility.
• Appropriate voyage planning.
• Speedy voyage execution.
• Quick despatch. Proper loading and discharging operations without
stoppages.
• Reduction of turn-­around time to the minimum.
Charterers’ requirement for high quality transport services includes the appropriate planning of the voyage, speedy and faultless loading and unloading operations, therefore the reduction of “turn around” time to the minimum. Charterers
desire the same high quality of transport service irrespective of the type of trade,
the type of vessel, the geographical area and economic developments.
The oil companies also wish to do business with shipowners who offer trading
flexibility, without commercial or geographical limitations concerning the vessel’s
usage, even in extremely sensitive environmental regions. Charterers want to charter
universally accepted vessels. So far as it is possible they wish to avoid any trading
limitations included in charterparties due to political or economical reasons. However,
it is almost impossible for a charterparty to have absolutely no trading limitations.
Charterers also require shipowners to execute the determined voyages with
utmost dispatch and without unjustifiable delays or deviations. It is difficult to
determine which delay is justifiable and which is not. If a logical master, who has
the voyage’s control and knows the prevailing conditions at trades and ports, judges
that a delay is necessary for the ship’s, crew’s and cargoes’ safety then the delay
is considered justifiable. Furthermore, the market conditions play a vital role in
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Chartering policy and marketing strategy
the determination of the desired sailing speed. For example, at the worst of the
economic downturn and in a high oil price environment, slow steaming was implemented in the tanker sector as a fuel-saving measure accepted by the charterers.
During the loading and unloading operation, the charterer requires the shipowner to exercise due diligence for the appropriate, safe and speedy receipt,
loading, unloading and delivery of cargo. In order to ensure the ship’s safety, the
shipowner has the duty to supervise the loading and unloading operation. If he
allows inappropriate loading methods, the shipowner is rendered responsible for
his actions or omissions. Loading and discharging must be performed in such
a manner, so that the cargo will not be damaged and the ship will not lose her
stability. In addition, the avoidance of stoppages during loading and unloading
operations is deemed necessary. The master should reduce the time of vessel’s
arriving–­loading and unloading–­departing, i.e. the ship’s “turn-­around” time, to
the minimum. The vessel’s stay in port is considered as non-­productive time, since
the productivity of a ship is measured in tonne-­miles per dwt, in other words it
is a function of the quantity of cargo carried and the distance of carriage. The
minimisation of ship’s delay at a port is the result of team-­work performed by the
ship’s master and crew, the port agent, the charterer, the cargo owner and the cargo
receiver, as well as other persons such as stevedores, port and custom officers etc.
The charterer desires his cargo to be transported with safety, to be delivered
on time and at the port of destination. All persons involved in oil transportation
must be appropriately trained according to the IMO’s requirements, in order to
ensure the appropriate loading, transportation, unloading and delivery of cargo.
6. Maintenance of good relationships with charterer.
For example:
• Good master–­crew–­charterer relationships.
• Good company–­charterer relationships.
The charterer wishes to maintain excellent relations and reliable communication channels with the ship’s master and crew, especially in the case of time or
bareboat charters. The charterer should be satisfied by the master’s behaviour and
actions, mostly regarding the ship’s compliance to commercial employment orders
and navigational instructions. It should be mentioned that in the case of a bareboat
charter, where the charterer undertakes the commercial operation and employment
of the ship, the master is obliged to comply with the orders and instructions of the
charterer regarding navigation, employment and operation. In the case of a time
charter, however, the charterer has only the commercial employment of the ship,
so the master is obliged to comply with the charterer’s employment orders and
not with his navigational instructions. Even though the charterer has no right to
give navigational instructions, he would expect the master to respond to his logical
demands on that. On the other hand, the master is obliged to act logically when he
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Chartering policy and marketing strategy
receives the charterer’s orders, some of which might require immediate execution
while others could need negotiation before executing.
Additionally, the charterer aims to maintain good relations with the shipping
company; more specifically he seeks optimum communication and co-­operation
with shore personnel, for satisfying his requirements, to the extent that shipowner’s interests are not damaged.
7. System of informing the client–charterer.
This includes, for example:
• Updated information system.
• Informative nature of shipowner’s advertising programmes.
The charterer finally considers that a modern ship information system could
also be essential in order to be aware of the voyage situations and ship’s monitoring. The system should be appropriately designed to provide, on a daily basis,
useful and updated information concerning the ship’s performance – in technical
and financial terms – such as fuel consumption, vessel’s service speed, ship’s
movements, estimation of arrival at ports, etc.
From this analysis, it is inferred that the charterers’ requirements in the tanker
market – and therefore their chartering policy – are largely dictated by safety and
environmental protection issues.
5.1.2 Charterers’ requirements in the dry bulk market
Dry bulk ships operating in the spot market must satisfy the charterers’ needs
concerning the vessel type and size, while also providing sea transport at a low
cost. Over the 20th century, improved efficiency, bigger ships and more effective
organisation of the shipping operation brought about a steady reduction in transport costs combined with a higher quality of service. The vessel must be available
to the charterer at the right position (area, port or dock), at the right time and at a
competitive freight rate compared to what other interested parties may offer and
what currently prevails in the present market.
Although a charterer’s selection criteria when choosing a shipowner in the dry
bulk market are similar to those in the tanker market, the order of importance
is different. In the dry bulk market the criteria which play a decisive role in the
selection process of a shipowner by the charterer are classified in order of importance as follows8:
1. Low cost sea transport operations.
2. Appropriate (fair and unselfish) chartering negotiating process.
8 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 133–134); Plomaritou, E. (2006) Marketing of
Shipping Companies (Athens, Stamoulis Publications, in Greek, pp. 216–229).
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Chartering policy and marketing strategy
3. Compliance of shipping company with the international regulations for
safety management.
4. Reputation and image of the shipowner in the shipping market.
5. Provision of high quality transport services.
6. Maintenance of good relationship with charterer.
7. System of informing the client – charterer.
From this analysis, it arises that the charterers’ requirements in the dry bulk
market and therefore their chartering policy are cost-­oriented.
5.1.3 Shippers’ requirements in the liner market
In the liner market a shipper typically follows completely different criteria in the
selection process of a carrier.9 These criteria are classified in order of importance
as follows10:
1. Provision of high quality transport services.
Quality of service mainly includes the following:
•
•
•
•
•
•
Schedule flexibility and wide geographical coverage.
Directness and regularity of sailings.
Reduction of turn-­around time to minimum.
On-­time pick up and delivery of the cargo.
Appropriate cargo handling.
Fast and safe execution of the voyage.
Given the nature of logistics today, shippers look for carriers who can offer
global coverage, frequency of sailings and flexible trade routes. Sea transport is
only one stage of the entire production process. Frequent sailings allow shippers to
plan correctly and reduce the level of stock kept at each end of the transport chain.
Due to the high value of general cargo (typically containers), shippers need carriers to execute trade routes directly without unjustifiable delays. Trans-­shipments
and container movements must be reduced to the minimum, so as to drop costs and
eliminate the possibility of cargo damage. Masters should also aim to reduce the
“turn-­around” time to the minimum. As it has been mentioned, the minimum stay
at ports is a result of teamwork by the ship, the agent, the owner, the shipper, the
receiver of cargo and other parts (e.g. stevedores, port and custom officers etc.).
The role of the agency network is of utmost importance in liner business.
9 In liner market the contract of cargo carriage is the bill of lading, where the contracting parties
are the carrier (shipping company) and the shipper, not the shipowner and the charterer as it is the
case in a charterparty.
10 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 134–139); Plomaritou, E. (2006) Marketing of
Shipping Companies (Athens, Stamoulis Publications, in Greek, pp. 246–259).
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Chartering policy and marketing strategy
Time in transit incurs an inventory cost, so shippers of high-­value commodities value speed. The cost of holding high-­value commodities in stock may make
it cheaper to ship small quantities frequently even if the freight cost is higher. For
example, a European manufacturer ordering spare parts from the Far East may be
happy to pay 10 times the ocean freight for delivery in three days by air, if the alternative is to have machinery out of service for five or six weeks while the spares are
delivered by sea. In the case of long journeys, the reliability of the schedule, as well
as the on-­time pick up and delivery of cargo are highly important. Unfortunately, due
to various circumstances, tasks are not always fulfilled as scheduled and issues occur
during the trip causing serious delays. With “just in time” stock control systems,
transport reliability has taken on great significance. Some shippers may be prepared
to pay more for a service, which is guaranteed to operate to time and as promised.
Shippers need carriers to facilitate the appropriate, safe and speedy receipt,
loading, unloading, protection and delivery of cargo. The master has the duty to
supervise the loading and unloading operations. If he allows inappropriate loading
methods, the carrier is rendered responsible for his actions or omissions. Furthermore, the avoidance of loading and unloading stoppages is crucial, as long as time
is money. Moreover, the cargo must be shipped onboard the vessel in accordance
with the terms of the booking note. In some cases of over-­booked vessels, a shipping company may not load the cargo on board as agreed in the booking note, but
instead warehouse it in the port until next departure. Similarly, a shipping company
may unload a container in a trans-­shipment port, where it is stored instead of trans-­
shipped to the connecting vessel as agreed. Finally, shippers request increased free
time11 in addition to the days allowed according to the customs of the ports.
Liner operators manage to strengthen their competitive position in the liner
shipping market by offering package solutions to transport problems, such as the
arrangement of door-­to-door services. According to shippers the ability of carriers to provide inland transport is a prerequisite to be selected by them.
2. Compliance of shipping company with international regulations of
safety management.
Shippers require from the carriers to care for the suitability of their vessels and
of their equipment in order to fulfil the safe transportation of the cargo. The carriers are obliged to provide ships designed, constructed, equipped, supplied and
staffed in accordance with the international regulations, in order to execute the
voyage safely and overcome those risks which could be met during the voyage
(ordinary perils of the sea).
Shippers also need clean and well-maintained containers without deficiencies,
for the safe transport of their cargo. Moreover, shippers request that the containers should comply with the global equipment quality standards. However, in
some ports there are some differences in what is considered as approved quality
11 Free time is the time period (calendar days) allowed to the goods to be stored at the port after
arrival and before pick-­up.
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Chartering policy and marketing strategy
for containers. Consequently, containers that are approved in the departing port
may not be approved in the destination port, making the shipper obliged to pay
an extra fee to the operator for the alleged quality deficiencies. Shippers do not
want to undertake the extra cost when such situations arise.
3. Reputation and image of the liner operator in the market.
Shippers take seriously into account the reputation and image of the liner operator (carrier). Liner companies create for themselves a reputation in shipping
circles, which is very quickly spread internationally. In the day-­to-­day exchange
of information, certain expressive wordings are used like “first-­class people”,
“unprofessional operators”, “good performers”, etc. Being labeled as “difficult”
indicates that the party in question is hard to co-­operate with, showing lack of
flexibility. Additionally, any experience of past loss or damage of cargo caused
by a shipping company affects the shipper’s decision. Shippers consider that a
very crucial selection criterion of a carrier and the renewal of a contract is the
ability of the carrier/­operator to comply with what has been promised and what
has been agreed in the contract of carriage.
4. Low cost sea transport operations.
Regarding the shippers’ requirement for the provision of transport services at
reduced cost, this does not necessarily constitute the decisive selection factor of
a carrier, although shippers always consider it seriously. Shippers may lose much
more money in case of damage of high value cargoes – due to poor quality of
transport service – compared to what they could have gained by compressing
their transportation cost. As a consequence, shippers place more importance on
the high quality of transport services than on the low cost of sea transport operations. Therefore, liner operators are involved much more than other shipowners
in improving cargo-handling equipment and in developing port facilities, so as
to satisfy their customers’ needs. As a result, automation of cargo handling and
investment in specialist terminals has transformed the liner business.
However, some shippers consider that a fixed rate on a yearly basis is very
important in order to be able to budget their transport cost throughout the year.
This is particularly important for shippers who own cargoes and price their goods
on the basis of budgeted costs over the year. That is one of the reasons why the
liner pricing has been transformed to “contract-­based ”, where shippers and carriers agree for their annual transport contracts.
5. Satisfactory co-­operation with carrier’s personnel and ship’s crew.
This includes, for example:
• Co-­operation with shore personnel (liner agents’ network).
• Master–crew–shipper relationship.
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Chartering policy and marketing strategy
•
•
•
•
Liner company–shipper relationship.
Co-­operation and response to shippers’ demands.
Settlement of cargo claims.
Efficient handling of cargo bookings.
Shippers seek satisfactory co-­
operation with the shipping company. The
immediacy of master of the ship, crew and shore personnel constitutes basic precondition of maintaining the client relationship. The relationships between the
master/­crew and the shipper must be excellent, in order to achieve smooth execution of the cargo transport. It must be emphasised that the same applies when
the liner vessel is chartered-­in by the liner operator. In such a case, which is not at
all unusual in the containership market, an independent owner has time chartered
his vessel to a liner company and bears the manning cost and the responsibility
of selecting the master and crew. Thus, the perfect relationship must be kept and
coordinated among the master and crew, the shippers, the shipowner of the vessel
and the liner operator.
Shippers ask for the understanding of their needs and the satisfaction of their
requirements. Such a requirement may be the flexibility of the liner operator to
carry more cargo than what has been committed in the contract of carriage. This
request may be expressed by shippers who experience seasonal demand for their
cargoes. The marketing philosophy generates and builds up long-­term relationships between the shipowners and the shippers. The shipping companies must
also maintain and strengthen contacts with old clients.
The skill and diplomacy exercised by the personnel of the claims department
are especially important. Such matters must be dealt with in accordance with
law and good practice, so that the liner operator does not lose the client. Shippers today value more the effective management of a shipping company that can
resolve problems presented during the cargo transport and respond efficiently to
reasonable shippers’ needs and requirements.
6. Information system for shippers.
This includes, for example:
• Information to shippers/Tracking communications system.
• Informative nature of advertising programmes of liner services.
Systems of electronic cargo booking, follow-­up of the carriage and continuous
updating are also demanded by shippers. A proper information system provides
shippers with increased sense of control and decreased sense of uncertainty.
Furthermore, informative advertising of liner services is deemed crucial for
attracting new clients and informing existing ones. Advertising material, such
as folders, annual reports, advertisements in trade magazines together with an
interesting website, are used by shipowners and/­or liner operators to create new
business opportunities.
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From the above analysis, it is concluded that shippers’ requirements in the
liner market (and therefore their chartering policy) are more oriented to quality.
5.1.4 Decision-­making process and buying behaviour of charterers and
shippers in bulk and liner markets
The decision-­making process of the charterer (in bulk market) and shipper (in
liner market) is a sequence of thinking, evaluating and finally deciding. This
process helps a shipping company (bulk or liner) to structure its approach and
form its chartering policy and marketing strategy accordingly. More specifically,
the basic stages of the charterer’s or shipper’s decision-­making process are the
following12:
1. The pre-­purchase choice among alternatives during the pre-­fixture
stage (in bulk market) or pre-­booking stage (in liner market).
This stage refers to all charterer’s or shipper’s activities occurring before
the acquisition of the transport service, in other words before the fixture
of the charter in the case of bulk market or before the booking of space
onboard in the case of liner market. This stage begins when the contract
of sale of goods is signed and the cargo has to be carried from the port
of origin to the port of destination. During this stage, the charterer or the
shipper, who may act on behalf of the cargo owner or be the cargo owner
himself, examines his transportation needs and collects information
regarding possible alternative vessels. The charterer or the shipper seeks
the appropriate ship that will undertake the cargo carriage. The charterer
in the bulk (tramp) market shows his interest for a specific type of vessel
and for a particular type of charter by drawing out the cargo order and by
exchanging offers and counter-­offers with interested shipowners. Charterers have a list of transport options on the basis of their experience,
convenience and knowledge. On the other hand, the shipper in the liner
market shows his interest for a specific vessel by searching for appropriate liner services according to his experience, market research, contacts
with liner agents or freight forwarders or from information sourced in
the shipping press and from the internet. The pre-­purchase stage includes
transportation need awareness, information and market search, as well as
the evaluation of alternatives. An important outcome of the pre-­purchase
stage is the decision of the charterer to fix a certain charter and the decision of the shipper to book space on a certain vessel.
2. The charterer’s or shipper’s behaviour during the carriage of goods.
Charterers and shippers have expectations about the performance of
the chartered vessel. The vessel must execute the voyage as quickly as
12 Plomaritou, E., Plomaritou, V. and Giziakis, K. (2011) “Shipping Marketing and Customer
Orientation: The Psychology and Buying Behaviour of Charterer and Shipper in Tramp and Liner
Market” Management – Journal of Contemporary Management Issues, Vol. 16, No. 1, pp. 57–89.
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possible and must deliver the cargo safely at the port of discharge. Additionally, the charterer and shipper have obligations during the charter,
which depend on the type of charter (see chapter 7). This stage is characterised by the prolonged interaction between charterer (or shipper),
shipowner, shore personnel, master and crew. It is from these inter­
personal interactions that the transport service experience is acquired.
3. The post-­purchase evaluation of satisfaction during the post-­fixture
stage (in bulk market) – or post-­booking stage (in liner market) – and
after the delivery of cargo to the consignee.
During this stage, charterer or shipper may experience varying levels of
doubt that the correct fixture or booking was made. Due to the extended
delivery process of service, the post-­choice evaluation occurs both
during and after the use of services rather than only afterward. There
are two ways of evaluating the quality of transportation services; the
compliance of the shipping company (and vessel) with the safety rules,
as well as the satisfaction of charterer’s requirements. Further to that,
compliance of the vessel to port state controls and minimum delays due
to vessel detentions can be added.
At this point of analysis, emphasis should be given to the external factors
caused by social forces and physical causes, which affect positively or negatively
the decision-­making process of charterers and shippers, as well as their chartering policy. More specifically13:
• Physical causes mainly concern physical catastrophes and weather conditions. For example, a heavy winter in Europe will increase the demand
for oil, the demand for tankers and consequently it may affect the chartering policy of tanker charterers.
• Social forces include political, technological and economic events. The
term political events is used to refer to such occurrences as localised
wars, revolutions, political nationalisations of foreign assets, strikes,
canal closures, flag boycotts, embargoes, oil crises, government changes
and similar events. The unforeseen political events bring about a sudden
and unexpected change in demand for sea transport services and consequently in the charterers’ policy.
• Technological events are mainly related to the great technological developments in cargo-handling methods, as well as in navigational practices.
Technical developments, such as the “no ballast system”, the “LNG fuel
for propulsion and auxiliary engine”, the “sulphur scrubber system”,
the “advanced rubber and propeller system”, the “speed nozzle”, the
“exhaust gas recirculation” etc. which if used together would result
in the Green Ship of the future. The transition from one technology to
13 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 53–56).
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another may affect the decision-­making process and chartering policy
of charterers and shippers. For example, technological developments
in shipbuilding may lead to an increase of demand for the new type of
vessel and to a decrease of demand for the existing technologically disdained tonnage.
The charterer’s and shipper’s buying behaviour is complex because it passes
through the decision-­making process comprising of:
•
•
•
•
•
the recognition of the need for cargo transportation,
the seeking of information (e.g. through the cargo orders),
the evaluation of alternative vessel employments,
the decision for negotiation,
the chartering pre- and post-fixture behaviour (in bulk market) or preand post-booking behaviour (in liner market).
The charterer’s and shipper’s buying behaviour involves risk in the sense that
any action taken by the charterer or shipper will produce consequences that he
cannot anticipate with any certainty, and some of which are likely to be unpleasant. With respect to uncertainty, the charterer (or shipper), for example, may have
never chartered the vessel X and may have never co-­operated with the shipping
company which manages the vessel X. Moreover, even though the shipowner has
performed the carriage of similar cargoes successfully in the past, the charterer
(or shipper) is not guaranteed that this particular voyage will end with the same
successful outcome. In addition, uncertainty is likely to increase if the charterer
(or shipper) lacks sufficient knowledge before the execution of the charter, concerning the particulars of the vessel, the business profile of the shipping company, past loss and damage experience of the company, etc. The consequences
of a poor decision regarding the chartering of a vessel could cause damages or
loss of cargo.
The charterer and the shipper perceive three types of risk. More specifically:
• Financial risk assumes that financial loss could occur in the case of
the vessel’s poor performance. Loss or damage of cargo in transit is an
insurable risk, but raises many difficulties for the shipper, who may not
be well prepared to pay more against the risk of damage for securing the
transportation of his product.
• Social risk relates to the idea that there might be a loss of the charterer’s
or shipper’s social status, associated mostly with the carriage of oil or
dangerous goods by sea.
• Shipping risk is described by the possibility of not recovering the investment in a merchant ship (including the anticipated return on the capital employed) during a period of ship ownership. When shippers are
able to forecast the demand of their cargoes in future (for example in
iron ore trades), or if they believe that sea transport is of great strategic
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importance, they may decide to take the shipping risk themselves by
acquiring ships or by chartering on a long-­term basis the vessels of
independent shipowners. However, there are many cases where shippers never know how many cargoes they will have in future and consequently they do not know how many ships they will need in the future
(for example in grain trades). As a result, the shippers enter into the
market and charter vessels when they need them. The shipping risk then
is undertaken by the shipowners.
By taking into consideration that charterers and shippers usually do not like
taking the above-mentioned risks, then it seems obvious that they will try, whenever possible, to reduce risk before fixture. One strategy of risk minimisation is
the brand ­loyalty. Brand loyalty is based on the degree to which the charterer (or
shipper) has obtained satisfaction in the past. If charterers (or shippers) have been
satisfied in the past with the transport services, they have little incentive to risk
trying a new shipping company. Having been satisfied in a high-­risk charter, a
charterer is less likely to experiment with a different owner. Maintaining a long-­
term relationship with the same shipping company helps to reduce the perceived
risk associated with the charter. This is why it is common to observe charterers and shippers chartering vessels from the same shipping company over long
periods of time or for repeated or renewed charters.
Another strategy of risk minimisation is the collection of information about the
vessel’s particulars, the shipowner’s reputation, the shipping company’s profile
and its past loss/­damage experience. Considerable information is provided to the
tanker charterers by the SIRE reports (see section 5.1.1).
5.2 Chartering policy of shipowners
5.2.1 Chartering policy of shipowners in bulk and liner markets
In bulk market the shipowner’s chartering policy defines the type of vessel’s
employment and vice versa. The shipowner comes to the freight market with a
ship available, free of cargo, with no employment. In small shipping groups, the
shipowner makes all the decisions about the employment of his vessels. In large
shipping companies, top management is more remote from the daily operation
of the business. Decisions are made by more complicated managerial schemes
composed of more than one person (for example a board of directors composed
of five or seven persons). In the case of listed companies, time charters may be
preferable so as to give some income visibility and provide the stockholder with
a possible dividend payout. During periods of strong or booming freight markets, chartering policy is usually focused more on spot charters, so as to reap the
benefits of this growth and give value to the shareholder of the company. On the
contrary, during times of freight rate recession, either short-­term time charters or
spot employment may be preferred, to avoid locking the vessel earnings at low
levels for a long period. It should be underlined that in the liquid bulk market, the
role of oil companies is crucial. These companies are relatively few in number,
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often huge in size and form the main clients of the tanker shipping companies.
Within this framework, the tanker shipping company should be in a position to
persuade an oil company to select and charter its vessels.
The daily and periodical fluctuations of freight rates in the bulk market
occur very quickly, thus the market situation changes from one moment to
the next. Consequently, the key factors in chartering tankers and bulk carriers
are synchronisation and optimisation in decision-­making, so that the fixture is
achieved at the best possible freight levels. The success of the shipowner in the
bulk market14 results from matching the free vessel with the available cargo,
fixing the appropriate type of charter, discovering the client’s needs, offering
suitable transport services that satisfy those needs, providing operating efficiency, communicating effectively with the target market and negotiating the
freight as a function to the services provided and what the current state of the
market dictates.
Ships operated in the spot market must comply with charterers’ demands
concerning vessels’ type, size, specifications and compliance with international
safety management regulations. Furthermore, the vessel must be available at the
right area, port or dock, at the right time and ask for a competitive freight level
compared to freight quotes from other interested shipowners. If the employment
in question is for a longer duration on a time charter contract basis, then the
importance of a shipowner’s solvency, financial strength, integrity, reliability and
reputation for good performance will increase correspondingly.
Fleet utilisation is another important point to mention. Most tankers and large
bulkers rarely find cargoes for their return voyages to the loading ports. This
means that they may be forced to execute the return leg in ballast. The shipowner
achieves the most appropriate and efficient commercial usage of his vessels when
he reduces “ballast legs” (voyages) to the minimum, eliminates off-­hire periods
and maximises the total earnings by a suitable combination of period contracts
and spot market trading.
Chartering policy of shipowners depends on the phase of the shipping market
and the respective expectations. In the case of a sharp increase in ships’ demand,
which cannot be immediately counter-­balanced by increasing supply through
new shipbuilding deliveries,15 the carriers will be placed into a strong position,
as charterers are in a period of excessive cargoes’ availability. Then, instead of
offering their ships for time charters, owners may seek to charter them per voyage in order to take advantage of the high spot freight rates. Shipowners committed beforehand to long-­term charters gain little in such a situation of a growing or
booming spot market. On the other hand, when ships’ demand starts to fade and
the spot market is expected to weaken in the near future, owners wish to fix their
vessels for longer periods in order to secure higher earnings than what otherwise
might be earned from the spot market.
14 Plomaritou, E. (2017) Chartering Policy of Shipping Companies (London, Lloyd’s Maritime
Academy, Module 7 of Distance Learning Course “Diploma in Maritime Business Management”).
15 There is a time lag of 1.5–3 years between the placing of an order and the delivery of a newbuilt vessel.
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In the liner market, the structure is completely different, since shipowners (carriers or liner operators) typically have a large and complex office staff and a geographically wide agency network to manage, so there is an unavoidable emphasis
on administration (see section 4.1). When the shipowner employs his ship in the
liner market, by providing services to anyone who wishes to transport cargoes
by sea (becoming “common carrier”), then the chartering policy is applied in a
different way than that in the bulk market. The chartering business in the liner
market is completely different to that of the bulk market. In the liner market
no lengthy and detailed chartering negotiations take place. General cargo in the
liner market finds most of its business through agents whose role differs greatly
from the role of chartering brokers or ship agents in the tramp shipping market
(see section 3.5). The shipper wishes to transport his cargo and for that reason
“books” space on a vessel through an agent. If the liner operator cannot transport the cargoes with his own vessels, then he charters-­in containerships or other
types of liner vessels from independent shipowners. In this case, the charterparty
verifies this chartering agreement of the vessel between the liner operator and the
independent shipowner. Typically, this occurs in the form of a time charter or less
frequently with a bareboat charter. Spot charters fixed between liner operators
and independent shipowners are rare. It may be broadly said that, what is known
as spot (voyage) charters in bulk shipping have only few similarities to the liner
services offered by the lines to the shippers in the liner market, in the sense that
both concern a specific cargo voyage.
When booking cargoes in the liner market, the success factors of the shipowner/­
liner operator/­carrier are the geographical coverage, frequency of sailings, regularity, reliability, short transit times, safety of cargo shipped, compliance with
international safety management regulations, efficient handling of cargo bookings
and settlement of cargo claims. Further strengthening of the carrier’s competitive
position can be achieved by offering package solutions to transport problems,
such as the arrangement of door-­to-­door transport etc.
5.2.2 Commercial risks faced by shipowners in chartering
Shipowners face increased exposure to commercial risks arising from charterparties, operations and claim issues. In certain circumstances, these risks are large
enough to undermine or destroy the financial base of shipowners. Successful
commercial decisions, chartering policies and marketing strategies assist them to
limit or even to avoid some types of risk.
With regard to chartering matters, the nature of commercial/­business risks
may be16:
• Financial: At the end of the day, each aspect of chartering results in a
financial allocation of risks. There are some risks of purely financial
16 Plomaritou, E. and Nikolaides, M. (2016) “Commercial Risks arising from Chartering
Vessels” Journal of Shipping & Ocean Engineering Vol. 6, Issue 4, pp. 261–268.
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Chartering policy and marketing strategy
nature, e.g. the risk of hire payment default by a time charterer. However, even the risks of operational or legal nature almost always lead to
a financial claim or motive.
• Chartering oriented, operational, navigational and geographical: It
comprises all those risks that arise from pure chartering orientation
(e.g. wrong chartering policy), as well as from operational matters of
a charter, such as for example cargo handling, shipowner’s delivery
of a seaworthy vessel to the charterer, provision of the cargo from the
charterer etc. Besides, commercial risks may be of navigational or geographical nature, e.g. navigating in dangerous seas (e.g. piracy areas)
or employing the vessel outside the agreed trading limits in a time
charter etc.
• Legal: All the risks related to the law of the charter are included in this
category. Legal matters may concern and affect the whole process of a
charter, comprising the pre-­fixture stages of investigation and negotiation of the charter, the fixture stages of drafting and signing the charterparty, the stage of the execution of the charter, as well as the post-­fixture
stages of the allocation of disbursements and the legal claims that may
arise from the charter.
• Ethical: The image and reputation of a company may be radically
affected from a charter. Considerable risks of ethical nature sometimes
arise. For example, a tanker owner is at risk of being liable for making
oil pollution when he employs a substandard vessel with a drunkard
master on board. Consequently, apart from the financial penalties, he is
subject to a huge risk of an ethical nature, as long as his reputation and
image will be badly harmed.
The most significant commercial risks arising from chartering matters are the
following17:
• The market risk: Every part of the shipping industry is always moving around the spot freight market of the vessels. All major shipping
decisions (chartering spot or in period charters, evaluation of alternative charters, selling or scrapping a vessel etc.) are directly based and
affected by the prevailing conditions of the freight market and the future
expectations of the involved parties. For example, if a shipowner fixes
his vessel for a three-year time charterparty at USD 10,000/­day and during that time the average rate of the respective spot market climbs at
USD 30,000/­day, the shipowner will suffer a huge loss of earnings.
• The risk of timing at decision-­making: The same decision (e.g. chartering vessels on the spot market) may be right at a specific point of time,
17 Plomaritou, E. (2017) Commercial Risks arising from Charterparties, Operations and Claim
Issues (London, Lloyd’s Maritime Academy, Module 2 of Distance Learning Course “Certificate in
Commercial Risks in Shipping”).
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whereas it may be wrong at another. The freight market is highly volatile
and cyclical. So, perfect timing of decisions is the initial key to success.
• The chartering strategy and policy risk: The selected chartering strategy and policy of a company determines the amount of risk undertaken.
When chartering a vessel, some important questions must be placed and
then answered, for example, as follows:
◦ Should we charter spot, taking the whole risk of high volatility of
the spot market? In other words, should we take on our own all the
potential upside but also all the downside risk of the market?
◦ Should we put the vessel in some form of period charter (time charter, bareboat), in such case fixing our future earnings, whilst taking
the risk of losing the upside potential of the spot market?
◦ Who is the counter-­party? Is he credible? What is his track record
and reputation? The longer the charter, the most important these
questions become.
◦ What is the market forecast? What are our expectations? What is our
character, mentality, temperament and psychology?
◦ When is the perfect timing for a decision?
◦ What are the available chartering alternatives at a specific point of
time and at a specific geographical location?
◦ Should we hedge or insure some chartering risks?
• The currency risk: The currency of the charterparty puts a significant risk
on the involved parties. Most charterparties provide that freight or hire payment is to be made in US Dollars. When earnings of a party denominated in
a different currency than the costs and expenses, then a currency exchange
risk exists. Taking into account that the exchange rate of some currencies
may have high volatility, this risk may sometimes be considerable.
• The bunkers risk: In a period of high oil prices cost of bunkers may even
form 60% of a ship’s total cost. In a voyage charter, such cost is borne
by the shipowner, whereas in a time or a bareboat charter the charterer
is responsible. It is self-­explanatory how critical bunker prices may be in
parallel with the selected type of charter. Besides, bunkers risk may have
qualitative aspects. The optimum choice of a bunkering company ensures
the good quality of fuel for the ship in order to avoid a damaged engine.
The geographical optimisation of bunkering in order to avoid deviations
is also crucial for chartering purposes. Moreover, the optimisation of bunkers quantity in relation to the carried cargo quantity is always of paramount importance. Finally, a ship’s damage or loss may lead to bunkers’
loss, for which settlement must be made between the contracting parties
of the charterparty in accordance with the facts of the case.
• The risk of loss: Vessel, cargo, bunkers and income may be lost, in full
or in part. Settlement will be made in accordance with the risk allocation between the parties of the charterparty, the execution of the charter,
shipping operations and claims disputes.
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• The risk of damage: Similarly, vessel and cargo may be damaged.
• The risk of delay: It is a considerable aspect of commercial risk. Vessel
and cargo may be delayed during a charter. The risk and cost of such
delay are allocated between the contracting parties of the charterparty.
In chartering matters “time is money”!
• The risk of death or injury: Shipping operations are extremely tough and
may sometimes cause the death or injury of involved persons (e.g. crewmen, stevedores). Liability is allocated between the contracting parties of
the charterparty, depending on the type and the applicable law of the charter.
• The freight risk: It is the risk which lies with the owner when he, fully
or partly, fails to fulfil his obligation to carry the cargo and thereby lose
his right to collect freight, in full, or in part, respectively.
• The credit risk: It is the shipowner’s counter-­party risk. It concerns the
risk of charterer’s default in payment of freight or hire.
• The interest rates risk, the inflation risk and the opportunity cost risk:
A charter agreement concerns a commitment of capital in the shipping
business. Therefore, such risks should not get underestimated when a
vessel is chartered.
5.2.3 Factors affecting shipowners’ chartering policy in bulk and liner markets
The way in which a shipowner operates the vessels under his control will vary
according to various parameters, such as trading intentions, requirements and
expectations, the global economy, current and anticipated charter market conditions and freight rate levels, as well as according to political and shipping
regulations enforced by governments and international bodies, flags, ports, classification societies etc.
Thinking more strategically about chartering, some of the most important factors playing a critical role in the decision-­making process of the shipowner are
the following18:
• State of freight market and expectations: When trade is buoyant and spot
freight rates are rising, shipowners, in anticipation of further rises, tend
to contract for shorter periods. When rates are expected to fall, shipowners tend to charter for longer periods so as to “secure” higher earnings
for the future. Therefore, the current time charter rate tends to reflect the
expected trend of spot rates in the future. If spot rates are expected to rise,
the current time charter rate may tend to be above the current voyage
rates; if spot rates are expected to fall, the current time charter rate may
tend to be below the current voyage rates. The duration of ship’s employment depends clearly on market outlook which is a significant factor that
shipowners have to consider before the final decision of a charter.
18 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 141–144).
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Chartering policy and marketing strategy
• State of the world economy and seaborne trade: The demand for shipping services is a derived demand, arising as a direct result of the
demand for the commodities which are hauled by sea. Shipping is therefore demanded not for itself, but because it is part of the production process of goods. Like all productive factors, demand for shipping derives
from the consumers’ ultimate want of goods and services. The level of
seaborne trade determines the amount and quality of shipping and cargo
space required as well as the type of ship’s employment and charter.
Fluctuations in the level of international trade may be caused by a number of factors. The aim of the shipowner is to respond on demand for
tonnage, adjust his strategic decisions and operational policies, finally
serving charterers’ transportation needs.
• Voyage estimations: Shipping companies have departments whose job
is to assess comparative costs and earnings between various alternative
ways of employing their ships. The object is to find the most suitable
charter. Although it might seem an easy matter to calculate the cost of a
specific cargo voyage from one port to another, or to calculate the rate
of freight or hire which will cover a shipowner’s costs, plus a reasonable
profit, these calculations can in fact turn out to be somewhat complex.
Market outlook, duration of charter, trading areas, charterers’ credibility, suitable charterparty and laytime terms, cargo sizes etc. are basic
factors that shipowners have to consider in this continuous evaluation,
calculation and decision-­making process (see analytically chapter 14 for
voyage estimation).
• Attraction of sub-­
contract: There are three reasons why subcontracting may be attractive.19 First, a large industrial player may not
wish to become a shipowner, but its business requires the use of a ship
under his control. Second, in such cases of major industrial players, the
time charter may work out cheaper than buying vessels, especially in
depressed freight markets and if the shipowner may have lower costs,
due to lower overheads and larger fleet size. Third, the time or bareboat
charterer may speculate by taking a position in anticipation of a change
in the spot market. So, for instance, he may time or bareboat charter a
ship, anticipating to earn more by sub-­contracting in higher spot rates.
It is advisable that sub-­charters should always be treated with absolute
caution by shipowners. One of the causes of the deep shipping crisis,
which burst up in the last quarter of 2008 in the aftermath of the Global
Financial Crisis, was the extensive sequence of charters and sub-­charters.
After a booming, all-­time record, six-year freight market in 2003–2008,
the freight rates collapsed at the end of 2008 and sub-­charters brought
about a “domino effect” in the shipping market. Some shipping companies went bankrupt, because the depressed spot freight markets lasted for
19 Stopford, M. (2009) Maritime Economics (London, Routledge Publications, 3rd edition,
p. 184).
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Chartering policy and marketing strategy
•
•
•
•
•
so long that shipowners and charterers of “chain charters” were not able
at last to respond to their committed liabilities, for example from 10-year
period charters that should be paid in very high hire rates.
Policy of the shipowner as approved by investors/­shareholders: The
timing of decisions about chartering ships is crucial. Shipowners should
have the investors’ approval concerning the ships’ employment. This is
the case either in public or in private shipping companies. For example,
a public company may attract investors’ interest by chartering its vessels
on long period charters with first-­class charterers on above market hire
rates, therefore offering the possibility of earnings visibility, fixed dividend payouts and higher capital gains to its shareholders. On the other
hand, a privately held family-­owned shipping company may be focused
on being flexible in chartering decisions by making a mixed balance of
spot and period charters depending on the freight expectations.
Relationship and experience with certain charterers/­
shippers: It is
strongly felt by the shipping community that personal contact and trust
between parties are becoming increasingly important. Charterers prefer to fix vessels owned by shipowners with whom they have excellent
business relations and very good past experience. Transport services are
“experience-­based” and charterers or shippers seek to co-­operate with
shipowners who have already offered high quality services and have
satisfied their requirements in the past. On the other hand, the shipowner
keeps lists of charterers which have a good reputation on the market
and are considered “first-­class”. The charter will tend to be fixed for
as long as the shipowner approves the charterer’s credibility. In other
words, when vessels are fixed for long period charters of 10–15 years,
the shipowner and the charterer overcome a simple customer relationship, becoming long-­standing shipping partners.
Type of vessels and quality of fleet: Shipowners are free to use whatever
ships they think will provide the transport service most profitably. When
a shipowner decides which vessels to operate, a number of determinants
should be taken into consideration, such as the type of cargo, the type of
shipping operation and the cargo trades. Furthermore, size, age, specifications and state of maintenance all play a vital role in determining a
vessel’s earning potential and chartering ability.
Geographical and trading limits of ship’s employment: The vessel’s
technical design characteristics and specifications (e.g. ship’s draught
and length, ice-­class etc.), as well as its flag, affect the geographical
and trading limits of ship’s employment and commercial performance.
For example, Very Large Bulk Carriers (VLBCs) cannot approach ports
with draught restrictions and old cargo-handling technology, whilst
tankers flying black-­listed flags are banned from approaching the environmentally sensitive US coasts.
Type of cargo and trade: The shipowner has to take into consideration
some basic questions about the cargo and the trade. For example:
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Chartering policy and marketing strategy
◦ What is the cargo nature and its handling requirements? Could it
damage the ship?
◦ What is the trade? Is it known and well-­established?
◦ What is the proposed charterparty?
◦ Are there any risks which cannot be assessed?
◦ What are the next obligations of the ship? Is it due for special survey
or drydocking?
Similar questions must be answered on a daily basis and chartering decisions
should be adjusted accordingly.
5.3 Marketing of shipping companies as a tool for improvement of
chartering policy
The marketing of a merchant shipping company deals with the satisfaction of
charterer’s or shipper’s transport needs, with the main aim being the profit maximisation of the enterprise. This satisfaction presupposes on the one hand correct diagnosis of the shipping market to better understand and forecast client’s
(charterer’s/­shipper’s) needs; and on the other hand appropriate planning, organisation and control of shipping company’s means to improve its chartering policy.
A misunderstanding of the needs of various customer groups and the inability of
implementing the proper chartering policy may result in substandard provision
of the desired transport services at non-­acceptable freight levels. This in turn
leads to the dissatisfaction of charterers/­shippers and the incapability of retaining
them, resulting in the commercial failure of the enterprise. Shipping marketing is
a considerable tool for improving the chartering policy, offering better transport
services, satisfying the clients’ needs, meliorating the customer relationships and
maximising the profit of the shipping company.20
The procedure of shipping marketing implementation includes the systematic analysis of all chartering alternatives in respect of vessel’s employment, the
choice of some of them, the determination of goals and finally the planning and
implementation of the necessary actions (strategies) for the goals’ achievement.
This process must be regarded as continuous and is included in the functions
of commercial management (see chapter 4). More specifically, the process of
marketing implementation in a shipping company includes mainly the following
stages (see Figure 5.1)21:
• Diagnosis: The shipping company, through a marketing information system, collects updated data regarding the economic and business climate.
20 Plomaritou, E. (2005) Marketing of Shipping Companies as a Tool for Improvement of Chartering Policy. A Comparative Analysis of Marketing Implementation in Bulk and Liner Shipping
Companies Worldwide and in Greece: A Case Study in Containership Market and Tanker Market
(PhD Thesis, University of Piraeus, Greece).
21 Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, pp. 45–102).
152
Chartering policy and marketing strategy
START
MARKETING
INFORMATION
SYSTEM
ANALYSIS OF
MARKETING
OPPORTUNITIES
SEGMENTATION
OF SHIPPING
MARKET
CHOICE OF
THE TARGET
MARKET
DIAGNOSIS
PLANNING OF
MARKETING
STRATEGY:
TOOLS OF THE
SHIPPING
MARKETING
MIX
RESOURCES OF
THE SHIPPING
ENTERPRISE
ARE UTILISED,
DEPENDING ON
OPPORTUNITIES
OF THE SHIPPING
MARKET
PLANNING OF
MARKETING
PROGRAMMES:
DISTRIBUTION
OF MARKETING
RESOURCES IN
THE TOOLS OF
MARKETING
MIX
DEFINITION &
DELEGATION OF
OBLIGATIONS
AMONG THE
EMPLOYEES OF
THE SHIPPING
COMPANY
PLANNING
ORGANISATION
CORRECTION
OF POSSIBLE
DEVIATIONS
COMPARATIVE
ANALYSIS OF
EXEMPLARY
PERFORMANCE
AGAINST
CURRENT
PERFORMANCE
IMPLEMENTATION OF
MARKETING
PLANS &
MARKETING
PROGRAMMES
IMPLEMENTATION
MEASUREMENT
OF THE
ACHIEVED
PERFORMANCE
CONTROL
Figure 5.1 Process of Marketing Implementation in Shipping Companies
Source: Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, p. 47).
Necessary information is sourced as concern as the position of the company within the shipping market (strengths, weaknesses, opportunities
and threats). Furthermore, the company evaluates every market segment,
examines the chartering policy and transportation needs of charterers and
shippers at the various market segments and selects its target market(s).
This stage assists the company to understand the requirements of its clients, as well as to recognise its competitive position in the shipping market.
• Planning: The shipping company determines a mixture of objectives, such
as the improvement of market share, the fixture of profitable period charters, the interception of shipping risk etc. The main aim of shipping marketing always remains the maximisation of company’s profit through the
satisfaction of charterer’s and shipper’s transportation needs. Moreover,
during this stage the marketing strategies and programmes are planned
carefully. Marketing strategies are the means and actions by which the
objectives are achieved and the chartering policy is improved. The marketing strategies are divided into the shipping marketing mix strategies, the
differentiation strategies and the positioning strategies (see section 5.5).
The marketing programmes include the basic decisions concerning the
budget used for the implementation of strategies. This stage assists the
shipping company to determine the means (strategies) by which its objectives may be achieved and its chartering policy may be improved.
• Organisation: The shipping company defines which objectives will be
met and by whom. Marketing is not done just by a marketing department.
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Chartering policy and marketing strategy
Chartering and operation departments also undertake the stages of marketing process. However, the real task of doing marketing is part of
everyone’s job in the shipping company.
• Implementation: At this stage of marketing process, the marketing plans
(strategies and programmes) are applied. In marketing-oriented shipping
companies, the charterer (or shipper) is at the centre of all activities. The
client is the concern not simply of marketing, chartering and operation
departments, but also of administrative personnel whose actions move
towards meeting his requirements. The marketing plans must be applied
correctly, so that the proper transport service is provided to the appropriate charterer/­shipper, at the right time and geographical area with the
appropriate vessel and at freight levels that satisfy not only the shipping
enterprise, but also the client, always keeping in mind the prevailing
market conditions.
• Control: During this stage the performance achieved is measured, a
comparative analysis of exemplary performance of marketing plans
against current performance is carried out, causes of possible deviations
are sought and business measures are taken for their correction.
The marketing of shipping companies is the provision of appropriate transport
services by the right people (personnel), to right clients (charterers/­shippers),
with the appropriate vessel (seaworthy and cargoworthy), at the proper time and
place (loading – discharging ports or trading areas), at a fair price (freight or hire)
with a suitable promotion.
It should be mentioned that marketing becomes even more necessary during
periods of shipping crises, where the oversupply of vessels puts the charterers in
the advantageous position of selecting the shipping company for the carriage of
their goods by sea. Consequently, in times of crises those shipping companies
with marketing strategies in place have more possibilities for chartering their
vessels than laying up them, because they have built good customer relationships
and an enhanced reputation in the shipping market. As competitive pressures in
global shipping, economical, political and social environments are broadened,
the need for effective marketing plans becomes more and more imperative.22
5.4 Shipping marketing with customer orientation
Shipping marketing is not only concerned with the planning and implementation
of successful programmes and strategies. For marketing to be successful there
needs to be a unique orientation throughout the company, which fosters the marketing concept and demonstrates an identical approach to all chartering activities.
22 Plomaritou, E. and Goulielmos, A. (2009) A Review of Marketing in Tramp Shipping International Journal of Shipping and Transport Logistics (Vol. 1, No. 2, pp. 119–155); Plomaritou, E.
(2005) “Marketing: the Greek Way” Shipping Network (London, Institute of Chartered Shipbrokers,
No. 1, Issue 6, p. 7).
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Chartering policy and marketing strategy
Customer orientation is the sufficient understanding of the target clients and
the ability to create superior value for them continuously. The term “customeroriented firms” is frequently used to describe how knowledgeable a firm is about
its client needs and how responsive it is in terms of a continuous value creation
and delivery. The essence of customer orientation is the successful management
of a relationship between the shipping company and the charterer/­shipper. Strong
business relationships must be developed with those clients that are able to assess
the value created and offered by the shipping company.
Shipping marketing orientation is based around a philosophy, which places the
client (charterer or shipper) first, and it recognises that every action taken by the
company ultimately affects the customer relationship.
Every interaction between the shipping company and the charterers/­shippers
can affect the quality of the transportation service and the benefits provided. The
main types of interaction are indicatively the following:
• The direct interaction between the service provider, such as a member of
staff or master or crew of the company, and the charterer (or shipper).
• The interaction between the charterer and the shipowner’s broker.
• The interaction between the shipowner and the charterer’s broker.
• The interaction between the charterer’s broker and the shipowner’s
broker.
• The interaction between the charterer (or shipper) and service facilities
(provided by the shipowner), such as the formation of bill of lading by
electronic means (e.g. EDI system).
• The interaction between the liner agent and the liner operator.
• The interaction between the liner agent and the independent shipowner,
when the latter has time-­chartered his vessel to a liner operator.
• The interaction between the liner agent and the master.
• The interaction between the liner agent and the shipper and/­or the freight
forwarder.
• The interaction between the charterer and other sub-­
charterers or
shippers.
If a true marketing orientation is to be achieved, all members of personnel and
crew need to know the main aims of shipping marketing and what marketing
really means.
The main aims of shipping marketing are:
• To understand the transportation needs of charterers and/­or shippers.
• To improve the chartering policy of the shipping company, in order to
offer the appropriate services and provide clients with benefits which
meet the above transportation needs.
• To ensure consistent quality of offered services.
• To retain existing and attract new clients (charterers or shippers).
• To achieve the shipping company’s objectives.
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Chartering policy and marketing strategy
• To build a good reputation of the shipping company in the market.
• To maximise the profit of the enterprise.
Customer orientation places the charterer (or shipper) at the centre of the
company’s activities. Being close to the client is the focal point of the marketing concept. All personnel as well as the crew need to be aware of the way
in which they can contribute to customer satisfaction, even when they do not
have personal direct contact (e.g. the employees of the accounting department).
Positive feedback from charterers should be relayed to everyone in the shipping
company through internal messages. Similarly, any quality problems or customer complaints should also be discussed at all levels to see if systems or processes within the shipping company can be improved. A necessary precondition
of an effective shipping marketing system is the understanding of charterers’ –
shippers’ requirements, their buying behaviour, as well as their chartering policy
(see section 5.1).
5.5 Marketing strategy and chartering policy of shipping companies
Marketing strategies are the means and actions by which the company’s objectives are achieved and the chartering policy is improved. The marketing strategies are classified into the shipping marketing mix strategies, the differentiation
strategies and the positioning strategies (see Figure 5.2). The overall aim of marketing strategies is to increase the profitability of the shipping company through
the improvement of its chartering policy, the provision of the appropriate transport services and the satisfaction of charterers’ and shippers’ needs.
PERSONNEL/CREW
DIFFERENTIATION
LOCALISATION OF
DIFFERENCES
TYPES OF SHIPPING
MARKETING STRATEGIES
POSITIONING
STRATEGIES
IMAGE
DIFFERENTIATION
DIFFERENTIATION
STRATEGIES
QUALITY
DIFFERENTIATION
SELECTION OF
DIFFERENCES
PRESENTATION
OF DIFFERENCES
GEOGRAPHICAL
DIFFERENTIATION
PROMOTION/ADVERTISEMENT
PROCESS/PRE & POST FIXTURE
PEOPLE/PERSONNEL & CREW
PHYSICAL EVIDENCE/VESSEL
PAPERLESS TRADE/E-COMMERCE
PLACE/PORTS & BERTHS
PRICE/FREIGHT & HIRE
PRODUCT/TRANSPORT SERVICE
STRATEGIES RELATED TO
THE SHIPPING MARKETING MIX
Figure 5.2 Shipping Marketing Strategies
Source: Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, p. 97).
156
Chartering policy and marketing strategy
For each market segment, appropriate marketing strategies must be planned so
that the proper transport service is provided to the appropriate charterer/­shipper, at
the right time and place, with the appropriate vessel and at freight levels that satisfy
not only the shipping company but also the client. It would be much simpler for a
shipping company if all factors that influence the charterers’ and shippers’ buying
behaviour were under its own full control. However, the shipping industry is a
globally complex sector and as a result the charterers’ and shippers’ buying behaviour and in a wider sense their chartering policy are shaped by many influences
from exogenous factors which are beyond the control of the shipping company.
5.5.1 Strategies related to shipping marketing mix
The shipping marketing mix refers to the set of tools that a shipping company
uses to improve its chartering policy, meliorate its services, satisfy its clients’
needs, promote its image in the shipping market, establish good customer relationships and maximise profitability. Shipping marketing mix includes eight
tools which are used for the planning of the appropriate marketing strategies (see
Figure 5.3). More specifically, the eight tools of shipping marketing mix – known
as “the 8Ps of shipping marketing mix” – are described below23:
1. Product – Service: The most important tool of the shipping marketing
mix is the maritime transport service which represents the offer of the
shipping enterprise to the client and includes the quality of the service
provided. The fundamental difference is between bulk and liner service.
However, even within the same shipping market there may be important
differentiations (see section 1.1 for market segmentation). Characteristic
examples of product/­service strategies are the expansion strategies of
company activities in bulk or liner markets. It is generally defined that
shipping groups which focus on the operation of a specific type and/­or
size of vessel follow a “specialisation strategy”, whereas those companies operating various vessel types and/­or sizes are said to follow a
“diversification strategy”. Very few mega-­carriers in the world are able
to be active in both bulk and liner markets. They may implement such
expansion strategies by possessing a large and modern fleet of bulk as
well as liner vessels, thereby servicing the needs of trade throughout the
world. Besides, it must be stressed that some ships (e.g. multi-­purpose
vessels, con-­bulkers, OBOs, PROBOs etc.) are designed to operate in
several different markets, whereas other vessels are specialising in the
carriage of one cargo category (e.g. containerships, tankers, bulk carriers,
23 Plomaritou, E. (2008) “A Proposed Application of the Marketing Mix Concept to Tramp and
Liner Shipping Companies” Management – Journal of Contemporary Management Issues, Vol. 13,
No. 1, pp. 59–71; Plomaritou, E. (2005) Marketing of Shipping Companies as a Tool for Improvement of Chartering Policy. A Comparative Analysis of Marketing Implementation in Bulk and Liner
Shipping Companies Worldwide and in Greece: A Case Study in Containership Market and Tanker
Market (PhD Thesis, University of Piraeus).
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Chartering policy and marketing strategy
gas carriers etc.). It must be recognised that in a depressed freight market, shipowners may move their investment from one market sector to
another in order to avoid market threats and to exploit opportunities. As
a result, supply/­demand imbalances in one part of the market can ripple across to other sectors. For example, in 2015, due to a deep freight
market recession and a negative outlook for dry bulk markets in contrast
with a strong freight market for tankers, some newbuilding orders for
bulk carriers were converted to tanker orders, resulting in an increase
of tanker supply and a drop of tanker freight rates. At this point, some
general conclusions and examples may be commented in respect of the
product/­service strategies followed throughout the shipping market:
•
•
•
•
•
•
Most shipping companies prefer to focus on either bulk or liner
operations.
In bulk shipping, small companies (1–5 vessels), medium companies (6–15 vessels) and large companies (15+ vessels) may all follow strategies of either specialisation or diversification. Typically,
for larger companies it is easier to diversify in various sectors.
Public (listed) companies may be specialised or diversified. As long
as they have to “sell an investment and growth story” to the shareholders, they often seek fixed employment for their vessels, income
“visibility”, stable dividend payout and capital gains. In that way, it
is more common for the public shipping companies to follow specialisation strategies (i.e. companies focusing only on tankers or
bulk carriers or containerships or gas carriers, not in many markets
at the same time). However, there are also cases of diversified listed
shipping companies.
Private companies may be specialised or diversified. They are in
general person-­oriented or family-­oriented groups, more independent in taking decisions and more flexible when selecting their chartering mix strategy.
In liner shipping, large operators are fully diversified mega-­carriers,
seeking global coverage for their transport networks, following
strategies of integration, horizontally (through forming shipping
alliances with other companies) and vertically (by offering for
to-­
door services, terminal and depot
example intermodal door-­
management, freight forwarding, logistics and agency services
etc.). On the contrary, small to medium liner operators usually
focus on more specific parts of the business and are more restricted
geographically (e.g. a niche operator offering only feeder services
in the Black Sea–­Mediterranean Sea region).
Independent shipowners of containerships typically follow a specialisation strategy, seeking for ships’ operational accuracy, so as
to be able to charter (in period contracts) their specialised vessels
to the liner operators. They aim at minimising off-­hire periods and
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Chartering policy and marketing strategy
•
•
building excellent relationships with their long-­term clients (liner
companies).
Gas carriers typically require a high degree of specialised, sophisticated and accurate operation. Such owners typically concentrate on
this segment, building close and long-­standing relationships with
their charterers, usually chartering their specialised vessels for very
long periods.
Marketing strategies, as shortly described above, are always closely
related with the chartering policies adopted from the shipping
companies.
2. Price – Freight: In all sectors of bulk market, the price of maritime transport service (i.e. the freight) depends on the negotiating power of involved
parties (charterer and shipowner) at a given moment, under the general
conditions of the market and under the special requirements of the specific
fixture. However, the freight of an individual fixture fluctuates around the
general freight level of the market, which is determined by supply and
demand for sea transport services globally and regionally. A great number
of factors, predictable or unpredictable, affect the supply of sea transport
and the demand for sea transport at any moment and therefore the corresponding freight level (see chapter 2). Bulk shipping freight rates are
characterised by high volatility and daily fluctuations. On the other hand,
in the liner market, the freight level is determined more or less by fixed
price tables which remain relatively stable for long periods (e.g. yearly
shipping contracts between shippers and liner operators), thus diminishing
market volatility and giving shippers the ability of planning transportation
costs more accurately. In bulk shipping, as far as the price strategies are
concerned, the following example may be mentioned: A big ship operator
might be able to charter one of his vessels at lower freight rate than the prevailing rate at the market, compressing his profit margins, due to vessel’s
lower operating costs arising from achieved economies of scale of larger
fleets. This could be done for various reasons, perhaps for keeping a good
charterer “happy”, or preferring to work with a credible charterer even at
lower rates, or for positioning well his vessel for the next charter etc.
3. Process: The process includes all the stages of the service offer. In the
bulk market, the process includes the pre-­fixture, fixture and post-­fixture
phases. More specifically, the pre-­fixture and fixture phases include the
following stages24:
•
•
The stage of sale of goods during which the relevant contract is
signed.
The investigation stage during which the charterer seeks for an
appropriate ship to transport his cargo.
24 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 399–401).
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Chartering policy and marketing strategy
•
•
The stage of chartering negotiation during which offers and counter-­
offers are made by the shipowner and charterer via their brokers.
The stage of fixture during which the charterparty is signed.
The post-­fixture phase concerns the execution of charter and includes
the following stages:
•
•
•
•
•
The preliminary (ballast) voyage.
The loading operation.
The carrying (laden) voyage.
The discharging operation.
The delivery of cargo to the recipient (consignee).
In the liner market, the process includes the pre-­booking, booking and
post-­booking phases and is similar to the process of the bulk (tramp) market. The basic difference between a pre-­fixture phase and a pre-­booking
phase is that in the latter case, instead of the negotiation procedure, a booking procedure takes place which leads to the issue of the booking note and
not to the signature of the charterparty. Besides, this procedure takes place
between the liner agent and the shipper or the freight forwarder, instead of
the shipowner, the charterer and their brokers. Additionally, the basic difference between a “bulk market” post-­fixture phase and a “liner market”
post-­booking phase is that the latter may include integration solutions and
door-­to-­door services offered to the consignee of the cargo.
Examples of process strategies are those intended to improve the negotiation procedures and skills, as well as strategies of voyage execution
with safety and speed. The chartering industry is very demanding. Contracts are negotiated within a few days, if not hours. Under the pressure
of difficult negotiations conducted at speed, by people located around
the globe, often by telephone or e-­mail, mistakes and errors can have
disastrous consequences. In this demanding and competitive environment, care must be taken to present a professional image, negotiations
must be conducted in a serious and businesslike way and charterparty
clauses must express the will of contracting parties. When the principles
of negotiation are ignored, the parties may well become liable for substantial claims. Moreover, the strategies of voyage execution may concern various aspects. For example, an optimum process in a specific liner
service (trade) comprises frequency and directness of sailings, scheduling flexibility, on-­time pick-­up and delivery of cargo, fast execution of
the voyage, reduction of turn-­around time to a minimum, appropriate
cargo-handling procedures during the loading and discharging operations, safe transport of goods, door-­to-­door delivery to the recipient etc.
Liner companies compete to each other for various “quality awards”,
such as for example the “Sailing Schedule Reliability Reward on
Australia–East Asia Trade”, in respect of applying improved process
strategies. Focusing on improving processes may be used as a powerful
marketing tool to achieve the enhancement of a company’s reputation.
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Chartering policy and marketing strategy
4. People: Human resources are vital for the provision of an appropriate
sea transport service to the charterer or shipper. Human resources comprise the office (shore) personnel, the master and the ship’s crew. The
relations of the master/­crew with the charterers must be excellent, especially in the case of time charters where the charterer has the commercial employment of the vessel. On the contrary, for a vessel operating in
the liner market no remarkable relations of the crew with the shippers
can be developed, as there are too many shippers in each voyage leg, so
many port calls and so fast “transit” and “turn-­around” times of the containerships. However, liner operator–shipper relationship is enforced by
the implementation of EDI systems which enables the shipper to monitor his cargo from loading to delivery. Office personnel and ship’s crew
must be qualified both in their professional skills and experience, so that
the smooth operation of the vessel and its efficiency are achieved. The
shipowning company must abide by the relevant codes, standards or
instructions recommended by the international maritime organisations,
the relevant state authorities and the registers (classification societies).
The above-mentioned standards concern professional training of the
seamen, in order that their skills meet the required certificates, safety
regulations and recent business developments in the industry. Characteristic examples of people strategies are the programmes of continuous
shore personnel and crew training. According to these strategies, a company’s office personnel and crew participate in training programmes in
order to be aware of new developments in the world shipping industry, for example in fields of interest, such as charter’s legal framework,
cargo handling and port customs, master’s duties etc. Some big shipping
companies maintain their own training centres for the continuous training of their personnel and crew.
5. Place – Ports: This tool of marketing mix includes the geographical
position of the ship in comparison to the geographical position of the
cargo to be transported, the ports of loading and unloading in a voyage charter, the ports of delivery and redelivery of the vessel in a time
charter, the geographical and commercial trading limits of the ship etc.
In case of a time charter engagement the charterers wish to employ vessels without trading and geographical limits. Instead of that, the time
charterparty usually specifies that the vessel must be used only within
a certain geographical area and that the charterers have the right of
breaching the trading limits only by paying an extra insurance premium
and after shipowners’ consent. Where a charterparty states that loss of
time caused by average (i.e. damage) due to a breach of International
Navigating Limits is to be for the charterer’s account, this provision
refers not only to the time lost on passage due to average but also to
the time wasted by the shipowner while the damage is being repaired.
A place strategy includes the policy of operating vessels with minimum
possible trading and geographical limits, for example the operation of
161
Chartering policy and marketing strategy
well-­designed, well-­built and well-­maintained ice-­class tankers which
can be navigated through sea ice in environmentally sensitive or dangerous trading areas. Leading tanker companies follow this example
by investing in large and modern fleets of tankers, with advanced specifications, which can meet the strict legislations of the environmentally sensitive regions and be employed at any sea, almost without any
trading and geographical restrictions, therefore gaining a sustainable
competitive edge in the market. Moreover, a place strategy concerns of
course the case where a shipowner, who charters his vessel in the spot
market, strategically selects a specific port rotation or a geographical
area which positions optimally his vessel for the next voyage or the
next charter, or even is safer for vessel’s trading than another geographical option.
6. Promotion: Distribution of a shipping service cannot take place in the
same way that a product is distributed, since in the case of services
there is nothing tangible to be delivered. Promotion represents the various actions the shipping company undertakes in order to propagate
to the charterers/­shippers the advantages of its fleet and to convince
them to fix a charter (in bulk shipping) or make a cargo booking (in
liner shipping). This tool of shipping marketing mix should emphasise
the benefits of specific services which are provided. The possible benefits will be evaluated by the charterer or the shipper. The charterer
will decide if he wishes to commence negotiations with the shipowning company by making an official proposal (firm offer) to the shipowner. The shipper will decide which liner company he chooses to
transport his cargo. The promotion of benefits can be made through
advertising, personal contacts, shipping press, participation in exhibitions etc. Advertising is considered one of the main factors of non-­
price competition. Maritime transport services are considered to be
experience-­based, namely their characteristics are made known after
the execution of a charter. Advertising can provide charterers or shippers – who may not have a previous professional co-­operation with
the shipping enterprise – with the necessary information, in order to
sign a chartering or shipping agreement with the company. Advertising operates at three levels; it informs, persuades and reinforces. In
order to inform, advertising normally relates to the promotion of new
or existing transportation services offered by vessels of the company.
There is also the public relations side of advertising, which includes
media relations and exhibitions. However, it must be emphasised that
advertising is a highly developed marketing tool throughout the liner
market, but instead this is not the case for bulk markets, where only
the biggest companies may follow such strategies. This divergence
is due to the nature of the service provided and the structure of each
oriented shipping services
market. Liner companies “sell” quality-­
(speed, reliability, accuracy, regularity, safety of transport etc.) to a
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Chartering policy and marketing strategy
wide spectrum of shippers worldwide. Bulk companies “sell” safety-­
oriented (for tankers) or cost-­oriented (for bulkers) shipping services
to far fewer charterers and shippers. Instead of advertising, bulk
companies promote themselves through personal contacts and build
their reputation mainly on two critical factors: (a) the increased size
of operated modern fleets, which offers better capabilities for economies of scale, broader geographical coverage and scope for improved
freight negotiations; and/­or (b) the operational efficiency of the fleet,
irrespective of the number of operated vessels. Nowadays, it goes
without saying that all shipping companies should have integrated
promotion programmes, possibly including a web page on the Internet, brochures, advertisements in the shipping press, participation at
maritime exhibitions and regular personal contacts.
7. Physical Evidence – Ship: This is the physical environment in which
the service is provided, i.e. the ship and its characteristics such as name,
year and country of shipbuilding, flag, class, cargo capacity, service
speed, draught, width, length, cargo-handling equipment, number and
type of holds, fuel consumption, etc. Before a charterparty is signed
between the charterer and the shipowner for a carriage of goods by sea,
the shipowner must check the ship’s suitability for fulfilling the transportation, which is designated by the term “seaworthiness”. The suitability of the vessel for seaway (seaworthiness) and the suitability of
the ship to receive and carry cargo (cargoworthiness) are related terms.
The obligation of the shipowner to provide a seaworthy ship includes
obligations concerning all sections of the vessel and engine, the supplies
and spares, as well as crewing. The shipowner is obliged to provide a
ship built, equipped, supplied and manned in such a manner, as to carry
the cargo safely to its destination and to overcome the ordinary perils of
the seas. The charterers’ satisfaction from the ship’s good performance
will lead to a possible repetition of the charter and a wider co-­operation
between the shipowner and the charterer. In liner shipping the concept of seaworthiness is similar to that described above. Characteristic
examples of physical evidence strategies concern the improvement of
vessels’ performance and efficiency, the company’s compliance to the
international regulations in respect of vessel’s design, management and
maintenance of fleet etc.
8. Paperless Trade: A basic tool that the shipping enterprise must use in
order to achieve its marketing objectives is called “paperless trade” and
constitutes the eighth “P” of the shipping marketing mix.25 The global
character of the shipping industry means ships operation requires vigilant follow-­up on a 24-hour basis. In addition, the shipping business
25 Plomaritou, E. (2005) Marketing of Shipping Companies as a Tool for Improvement of Chartering Policy. A Comparative Analysis of Marketing Implementation in Bulk and Liner Shipping
Companies Worldwide and in Greece: A Case Study in Containership Market and Tanker Market
(PhD Thesis, University of Piraeus, Greece).
163
Chartering policy and marketing strategy
PRODUCT–SERVICE:
TRAMP OR LINER
SERVICE
PLACE:
TRADING LIMITS/
PORTS
PAPERLESS TRADE:
ELECTRONIC DATA
INTERCHANGE
PHYSICAL EVIDENCE
OF THE SEA
TRANSPORT SERVICE
PEOPLE:
EMPLOYEES
& CREW
SHIPPING
MARKETING
MIX
PRICE:
FREIGHT/
HIRE
PROCESS:
NEGOTIATION &
EXECUTION OF THE
CHARTER
PROMOTION
OF SEA TRANSPORT
SERVICE
Figure 5.3 The Tools of Shipping Marketing Mix (“8 Ps”)
Source: Plomaritou, E. (2008) Marketing of Shipping Companies: A Tool for Improvement of Chartering Policy (Athens, Stamoulis Publications, p. 86).
is characterised by the voluminous and time-­
consuming exchange
of documents. Shipping companies, in order to respond fully to the
demands of the competitive shipping market, use modern electronic
communication means by which time, cost and effort are saved and
service quality is improved. Electronic trade is a combination of business activity and practices, which allows the accomplishment of commercial processes via electronic means. Electronic methods are applied
to a broad field of shipping activities, which includes charterparty
editing and chartering negotiation (e.g. the BIMCO IDEA electronic
system of drafting charterparty clauses, structuring charterparties and
facilitating negotiations), issuance of shipping documents (e.g. bills of
lading), follow-­up of the ship’s movements, communication between
ship – office – charterer, flow of information, advertising of sea transport services, support of the client (charterer/­shipper), as well as electronic payments. Enterprises which use electronic paperless trade gain
functional and strategic advantages, whilst improving their competitiveness and status. By using an electronic data interchange system,
the shipping company provides improved high-­quality services to its
clients, maintains better business relations with them and gains a competitive advantage in the shipping market. Paperless trade was initially
adopted in liner shipping in the 1990s, whilst bulk shipping companies
followed in the 2000s.
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5.5.2 Differentiation and positioning strategies
During the marketing planning stage, special emphasis should be given on
designing the differentiation and positioning strategies for gaining competitive
advantage. Once the target-­market26 is selected, successful shipping firms establish a differentiation strategy, which sets them apart from competitors in their
clients’ eyes. Success through differentiation demands skills that completely
diverge from those needed for cost leadership. The differentiator wins by offering
a transportation service that is unique or superior to competitors. Shipping companies aim to achieve superior performance by adding value to the sea transport
services. One way in which firms seek to gain an advantage over their competitors is by providing greater quality service. Added value can also be achieved by
offering completely new services which are not yet available from competitors,
by modifying existing services or by making them more easily available to customers in order to gain a competitive advantage.27 The shipping company can
differentiate its offer from that of its competitors through the following differentiation approaches28:
• Qualitative Differentiation: According to charterers and shippers, the
quality of services offered includes mainly the reliability, frequency,
flexibility, immediacy and speed of service, as well as the safe carriage
of goods by sea. A shipping enterprise can achieve a qualitative differentiation with the offer of special services to its client – charterer or
shipper – in comparison to the package of benefits that its competitors
offer. In this framework, this is more important and frequent in the liner
market than in the bulk market. In bulk shipping, qualitative differentiation is almost identical to the operational supremacy, adequate fleet size
with modern vessels, market status and character of the shipowner.
• Geographical Differentiation: The enterprise may achieve geographical
differentiation with its ability to obtain a competitive advantage arising from a geographical parameter. An example of geographical differentiation is the case of a liner operator, who possesses and operates a
modern fleet of containerships, managing the largest route network and
serving the needs of trade worldwide. This is a strategy followed by
the leading companies of the liner market. Furthermore, geographical
differentiation may be achieved even by a smaller niche liner operator
which focuses on a specific geographical region, for example a Latin
America or an intra-­Asian or a Mediterranean Sea liner service. Even in
bulk shipping, there are ship operators trading their vessels in specific
26 The target-­market is the sum of charterers/­shippers that have the same transportation needs,
they express eagerness in buying the transport services and show a high degree of buying force.
27 Plomaritou, E., Goulielmos, A. (2014) “The Shipping Marketing Strategies within the Framework of Complexity Theory” British Journal of Economics, Management & Trade Vol. 4, Issue 7,
pp. 1128–1142.
28 Plomaritou, E. (2017) Marketing Strategy of Shipping Companies (London, Lloyd’s Maritime
Academy, Module 7 of Distance Learning Course “Diploma in Maritime Business Management”).
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geographical regions, e.g. dry bulk operators which activate their fleet
either in the Atlantic or the Pacific basin.
• Personnel and Crew Differentiation: In this case the enterprise excels
by employing the appropriately trained personnel and crew at company’s offices and vessels. A shipping company may achieve that by providing crew with continuous development at its training and simulation
centres.
• Image Differentiation: This is achieved by maintaining the best possible
profile of the enterprise to the bankers, insurers, suppliers, brokers and
agents, charterers and shippers or even investors and personnel (ashore
and onboard). To build a very good image in the market possibly needs
years; however it may be ruined in just a few minutes, either from an
operational mistake (e.g. an accident causing heavy oil pollution to the
environment) or from a strategic error. This is the case in tanker and gas
carrier markets in particular, as the environmental risk is higher than in
other sectors. Image should be matched with reality, in the sense that a
good reputation is substantiated by vessels’ operational efficiency and
excellence, quality services provided to the customer, as well as integrity and character of the shipowner.
The more effective an enterprise is in differentiating its transportation services from competitors, the greater its power is. The quality, personnel/­crew,
image and geographical differentiation aim to reduce the competition on freight
rates, even if in any case price differentiation does not apply largely in shipping
companies.
A shipping company can realistically aim to be leader or competitively strong
enough in one of the above-mentioned fields, but not in all at the same time. It
therefore enforces those strengths, which will give it a differential performance
advantage in one of these benefit areas. A characteristic of the differentiation
strategy of a shipping company is that innovation of a sea transport service cannot be easily copied due to the high capital cost of vessels. So, a shipping company seeking to differentiate by innovation should not find its innovatory service
copied quickly by competitors.
The positioning strategy refers to the selection of differential advantage, which
defines how the company will compete with rivals in its target segment(s). In this
way, positioning strategy designates what the company is in relation to its competitors. The appropriateness and effectiveness of the positioning strategy is the
major determinant of business growth and profit performance. The positioning
process of a shipping company includes the following stages29:
• First, the shipping company spots the possible differences in its sea
transport services compared to other competitive enterprises.
29 Plomaritou, E. (2017) Marketing Strategy of Shipping Companies (London, Lloyd’s Maritime
Academy, Module 7 of Distance Learning Course “Diploma in Maritime Business Management”).
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• Second, the shipping company selects the most important differences
leading to a comparative advantage over its competitors. Some firms
prefer the selection of only one competitive advantage – and no more –
in the target market.
• Finally, the company shows and promotes that difference within its target market.
Differentiation and positioning strategies play a vital role in improving the
chartering policy of a shipping company, creating a competitive advantage, providing added-­value transport services, satisfying the charterers’ and shippers’
needs in a more efficient way than that of competitors and finally maximising the
profitability of the company.
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CHAPTER 6
Sales contract, carriage of goods
by sea and bill of lading
Up to this point, analysis has been focused primarily on the presentation of the
charter/­freight markets, the nature of chartering business and the critical managerial or practical perspectives. Chartering is a part of commercial management
of ships, which, however, cannot exist by itself. The operative force is always a
sales contract of goods and subsequently the need for sea transport. First, there
is a sale/­purchase of merchandise; second, a need for sea transport; and third, a
need for chartering a vessel. Before proceeding to the “core” chartering matters,
this chapter intends to show the general context, by investigating how chartering
business is related with the international laws and practices of sales of goods
and their transport by sea. Therefore, significant subjects are examined, such as:
the importance of the sales contract; Incoterms® 2010 rules, a practical, widely
recognised set of internationally accepted trade terms, defining by whom and
how sea transport is organised, performed and paid for; the contractual relations
among sellers and buyers of goods and sea carriers; the charterparty and the bill
of lading as main contracts of sea carriage; the documentary letter of credit as
the most commonly used method of payment for exports; the carriage of goods
by sea international cargo conventions; the critical functions of bills of lading or
other similar transport documents; the carrier’s liability for damage to or loss of
goods; and finally how major risks are insured.
6.1 General remarks
It is supposed that a buyer in Holland wishes to buy some pieces of machinery
from a manufacturer in Singapore. When making their sales/­purchase contract
the parties will consider a number of critical questions: When will property of
the goods pass from the seller to the buyer? When will risk for the goods is
transferred? Who is responsible to arrange and pay for the transportation and
the insurance of the goods? What is the financing scheme of the sale? By what
date should the goods be delivered or actually reach the buyer? When and how
will payment be made? From this example it is inferred that the sales contract is
the “legal instrument” which induces a set of legal relations. The sales contract
is thus decisive not only for the relation between the seller and the buyer of
goods, but also for a number of ancillary reasons; it sets out rules for the price
determination, the payment methods (e.g. documentary letters of credit), as well
as principles for delivery of cargo and risk allocation which affect transportation
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and insurance issues, etc. Several parties may be involved in such international
transactions and, depending on the agreed distribution of risks and costs in the
sales contract, a number of duties will be put on the seller and the buyer, respectively, who will then enter into the various ancillary agreements, for example the
vessel charter agreement or the contract of cargo carriage, the insurance contract
or a letter of credit. Thus, the contractual relations differ and there is a need for
co-­ordinating the respective rights and obligations of the various parties involved
in the different transactions and contracts. Even if the sales contract is practically
decisive for the ancillary contracts, all of them are separate from each other and
are governed by different legal jurisdictions.
6.2 The sales contract as the basic agreement in the export transaction
The sales contract stipulates the object of the agreement (namely the sale and
purchase of the goods), the price, the method, the terms and the conditions of
payment, the means of transport and the delivery, the risk distribution between
the parties which in turn affects also the insurance of goods, the financing of the
purchase, etc. Purely domestic sales are regulated by national laws, but the international sale transactions are mostly governed by the rules of a widely accepted
convention, known as the “United Nations Convention on Contracts for the
International Sale of Goods” (abbrev. “CISG” or the “Vienna Convention” in
short ) and developed by the United Nations Commission on International Trade
Law (UNCITRAL) in Vienna in 1980. This is a treaty providing a uniform international sales law, being adopted by a large number of countries which account
for a significant proportion of world trade. In this sense there has been a harmonisation in this particular area of law. The UK, India, Hong Kong, Taiwan and
South Africa were the major trading countries which had not ratified the CISG
convention as per 2016.1
The sales contract sets out the framework of the sale, including the type of
goods, the quantity, the time of delivery, the price etc. The sales contract deals
also with the related contracts, e.g. the agreements on financing, insurance and
transport. Some of the principal questions which arise in connection with the
sales contract are answered in the so-­called transport or delivery clause, in which
the parties agree on the apportionment of the risks and expenses involved in the
transportation of the goods. Within this context, internationally accepted rules
called “Incoterms” have been established and may be used to facilitate the commercial practice, the cost allocation and risk transfer of the sale transactions.
For example, the parties may agree to follow either an FOB or a CIF or another
Incoterms rule in a cargo sale (see analytically section 6.3 for Incoterms® 2010
rules). However, such clauses do not directly regulate the payment terms and
conditions, that is, when, where and how payment is going to be effected or the
way the collection of money is secured by the seller.
1 www.uncitral.org/­uncitral/­en/­uncitral_texts/­sale_goods/1980CISG.html (accessed 11 June
2017).
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Many difficulties and disputes that arise in international trade law and practice
may be explained by a lack of synchronisation between sales contracts, financing
contracts, contracts of carriage and insurance terms and conditions. In practice, it
is rather inconceivable that all parties involved in the different connected transactions have knowledge of all the other related transactions, but normally they
only know in detail about their own contracts. However, it is essential that all the
parties involved make sure from the beginning that, as far as practically possible,
their various contracts are designed in such a way that the delivery from the seller
to the buyer can be performed without too many problems occurring. Therefore,
the sales contract may be either sufficiently wide to allow for various alternatives
to be followed, or narrow enough since it is already clear that there will have to
be a particular solution. For example, a payment clause in a sales contract could
only call for payment to be made by a letter of credit, or specifically state that “an
irrevocable letter of credit to be opened by X bank not later than Y day and valid
for a period up to and including Z day and available for payment against the
presentation of the following documents: clean bills of lading, invoice, insurance
documents”. This being said, it has to be reiterated that the various contracts are
separate and it is rare that any of the different contractual parties, except the seller
and the buyer, has an overall view of the basic contract and the ancillary ones.
6.3 Incoterms® rules2
Most legal systems contain legislation dealing with the sales of goods or provisions concerning the relationship between the seller and the buyer, although in
practice the parties normally regulate their relationship by agreement. Different
legal systems may deal with similar questions in slightly different ways. This has
led to certain difficulties in international trade, requiring special efforts to harmonise the sales law provisions of different countries. As mentioned, in the field
of sales law a great effort has been made to improve harmonisation through the
international sales convention called CISG and issued in 1980, the rules of which
having been adopted by a large number of countries – with the exception of the
UK and a few other major nations.
Further to that, another practically important set of rules which have a considerable impact on the passing of risk between the seller and the buyer of goods are
the Incoterms® rules, which determine the meaning and effects of certain transport clauses used in international trade (e.g. FOB, CIF etc.). Incoterms definitions are published by the International Chamber of Commerce (ICC). Their first
version dated back in the 1930s, while the latest version was published in 2010,
thus it is known as “Incoterms® 2010 rules”. Since the 1990s, the last revisions
of the Incoterms rules were gradually amended to bring them in line with modern
transportation methods and to mirror new transportation risks. For example, the
traditional FOB and CIF Incoterms® concepts had to adapt to the modern cargo
2 “Incoterms” is a trademark of the International Chamber of Commerce (ICC). Available on
www.iccwbo.org.
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equipment traffic and new terms were created to reflect those changes (e.g. the
“Free Carrier – named destination” Incoterms® rule). The Incoterms® rules
were revised, restructured, expanded and divided over time. Some supplementary clauses were introduced, other terms were deleted as outdated and Incoterms® rules were grouped into C, D, E and F clauses according to their meaning
and commercial practice. These will be explained further in section 6.3.2.
6.3.1 Risk, cost and liability distribution in the transport chain
Incoterms® rules define by whom and also how the sea transport will be organised, performed and paid for. FOB and CIF are still probably the most used traditional Incoterms clauses in bulk transportation. Under traditional FOB terms,
the buyer of the goods will basically be organising the sea transport and acting as
charterer of the ship, thus being the counterpart of the shipowner and a signing
party to the charterparty in the open bulk market or to the booking note in the
liner market. Besides, in such a case the buyer may also be acting as the shipper
of the cargo to the bill of lading. On the contrary, when CIF terms are agreed in
the sales contract, the seller of the goods plays the above-mentioned roles.
At this point it should be cleared ­out that a charterparty (C/P) in the bulk
market or a booking note (B/N) in the liner market, in either case supplemented
by a bill of lading (B/L), are the principal contracts which cover the part of the
carriage of goods by sea following a cargo sale transaction. In charterparties the
division of responsibilities and costs between the shipowner and the charterer
(the “contracting parties”) is often well defined and the points related to “the
passing of the risk and costs” are very clearly set out. Although the relevant terms
and their differences (e.g. between FIO and liner terms in deciding the allocation
of cargo-handling costs) are discussed below in section 11.6 and in the glossary,
some major points are briefly introduced here.
In the bulk market the individual voyage charterparty is often based on “fio
terms” (free in and out) or similar, whereas in liner trades the so-­called “liner
terms” are frequently used, though there are occasions when full liner terms (synonym: “gross terms”) may also apply in open market fixtures. Under FIO terms
the charterers are organising and paying for the loading and discharging of the
goods, and the charterers also guarantee the cargo-handling operation during the
time the ship spends in port (see chapter 15 for analysis). On the contrary, traditional “liner terms” means that the owner will be organising and paying for cargo
handling; this service is often extended by mutual agreement to cover a range of
activities on the shore side. Under liner terms the owners will bear the risk and
responsibility for the duration of the ship’s stay in port, but owners may request
that charterers (shippers) accept FAC (“fast as can”) terms, meaning that cargo
must be delivered alongside for loading, received alongside on discharge as fast
as the vessel can actually receive onboard, take out from the holds. Finally, in
regular liner services shipowners (carriers) may undertake a full door-­to-­door
intermodal transport, from the warehouse of the seller to the warehouse of the
buyer. All the above are illustrated in Figure 6.1.
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Figure 6.1 The Transport Chain under a FOB Contract
Every export transaction gives rise to several relationships, namely between:
• the seller and the buyer of cargo, which is governed by the sales
contract;
• the seller or the buyer of cargo (depending on the agreement of the sales
contract) and the carrier, which is governed by the contract of carriage
and more specifically by the charterparty in the open or bulk market,
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the booking note in the liner market and is supplemented in either case
by the bill of lading or similar (e.g. waybill);
• the seller or the buyer of cargo (depending on the agreement of the sales
contract) and the insurance underwriter, which is governed by the cargo
insurance policy;
• the seller or the buyer of cargo (depending on the agreement of the sales
contract) and the financier/­bank, which is governed by the financing
contract, the documentary credit etc.
• one of these parties and other ancillary suppliers of service.
Depending on the contractual relationship, the parties are also referred to
under different headings; for example in the cargo carriage relationship the seller
or buyer of the cargo may appear as shipper or consignee contracting to a bill of
lading, or as charterer contracting to a charterparty; in a letter of credit transaction the buyer of cargo will be the instructing party and the seller of cargo the
beneficiary, etc. This means that the various contracting parties may be involved
in different ways in the different contractual relations, e.g. the seller in a cargo
sales agreement may also be the charterer in a ship charter agreement, a beneficiary under a letter of credit and the insured party under a cargo insurance policy
as the case may be.
The risk of damage to or loss of goods or the delay damages may thus pass
through several levels. Basically, there is a distribution of costs and risks between
the seller and the buyer, but also the other relationships contain risk allocations.
Even if under the contract of sale and in relation to the seller the buyer is liable
for the goods sold, he may in turn claim damages from the carrier or the cargo
underwriter in case of delay, loss or damage to the goods, depending on the risk
distribution formula applied and following applicable contractual provisions and
relevant legal rules.
The parties may understand their positions and their relationships in different ways. The seller is often not willing to grant a credit to the buyer unless he
knows and trusts him well or has adequate financial security. When goods are
sold within a country, a seller will often regard the goods he sells as a sufficiently
good security for the purchase price. He will not wish to lose possession of them
until the price is paid. If this is not possible, he will seek to retain some interest
in the goods which he might then sell if payment fails. In international sales,
however, the seller in this respect may for practical reasons be in a less favourable position. Security interests in the goods may be of little value to a seller who
might have to try to enforce a right over property several thousands of miles
away in another jurisdiction. He often feels that he must have rights which are
more predictable and more easily accessible. Thus, a purchase on terms, such as
cash on delivery (COD) prevents the buyer from getting delivery of the goods
before he has paid – often through a bank – but it does not protect the seller from
expenses for sending the goods, unless payment for such costs is secured. This
may be done through advance payment. The buyer, in his turn, is not in a very
much better position if he is asked to pay before the goods have even been sent
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and, even worse, when they have been sent, if they do not conform to the terms
and conditions of the sales contract. Therefore, the buyer is often not willing to
effect payment before delivery of goods has taken place.
International commerce has over the years worked out a number of measures
to mitigate such trading risks. To that effect, an important role has been played
by the use of the documents exchanged in international sales transactions, the
evolution and adjustment of Incoterms® rules and the payment by documentary
letters of credit. When the seller has fulfilled his obligations under the sales contract, he is entitled to be paid upon the presentation of the documents involved.
At this point the buyer, in his turn, should have made financial arrangements so
that he can meet this requirement. The procedure may vary but, in international
trade, payment by letter of credit (see below, section 6.4) is important to create a
balance of security interest for the seller and buyer.
Figure 6.2 illustrates an example of an international sale transaction between a
Belgian seller based in Liege and a British buyer based in Leeds. Depending on the
agreement and the situation, a sales contract may involve various transport stages,
transport clauses, different involved parties and several contractual relations.
6.3.2 Incoterms® 2010 rules
Incoterms® 2010 rules is the eighth set of pre-­defined international contract
terms published by the International Chamber of Commerce (ICC), with the first
set having been published in 1936. In an effort to reflect the current commercial
practice in the latest version, some of the clauses were amended and others were
deleted or replaced. Incoterms® 2010 rules contain 11 terms, slightly fewer than
the 13 defined by Incoterms® 2000 rules. Four rules of the 2000 version have
been replaced by two new rules in the 2010 set.
Figure 6.2 Contractual Relations under the Sales Contract
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In the revisions made in 1990 and 2000, the rules had been divided into four
categories, the C, D, E and F groups, according to the criterion of the increasing
responsibility and risk of the seller (the one E term had the least responsibility
for the seller, growing to F, C and D terms accordingly). However, in the latest
edition the 11 pre-­defined terms are subdivided only into two categories based on
the method of transport delivery. This means that seven of the rules may apply at
all modes of transport, while the other four are applicable only to cargo sales that
solely involve transportation by water, where the condition of the goods can be
verified at the point of loading on board the ship. Therefore, those four terms are
not able to be used for containerised freight, other combined transport methods,
or for transport by road, rail or air.
It is important that the sales agreement explicitly refers to the Incoterms®
rules of a certain year of publication, since otherwise a problem may occur
with respect to which set or specific clause shall apply. The parties should be
aware of the differences between the different versions. It may be mentioned
that the FOB and the CIF Incoterms® rules are traditionally the most common
ones in international sales, but they are currently, to a large extent, confined to
the sale of bulk products. For container trades CPT and FCA Incoterms® rules
should be used instead. In present sales contracts reference should be made to
the latest edition of Incoterms® 2010 rules, unless the parties intend another
version to apply.
Among Incoterms® rules, there are certain provisions that have a special
meaning – some of the more important ones are defined below3:
• Delivery: The point in the transaction where the risk of loss or damage
to the goods is transferred from the seller to the buyer.
• Arrival: The point named in the Incoterms® rule up to which carriage
has been paid.
• Free: Seller has an obligation to deliver the goods to a named place for
transfer to a carrier.
• Carrier: Any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea,
inland waterway or by a combination of such modes.
• Freight forwarder: A firm that makes or assists in the making of shipping arrangements.
• Terminal: Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or air cargo terminal.
• To clear for export: To file shipper’s export declaration and get export
permit.
A brief explanation of the different clauses is set out below, but parties wishing
to use these clauses in their commercial practice are recommended to refer to
3 Mayer, R.A. (2013) International Business Law: Text, Cases and Readings (Harlow, 6th
edition, Pearson).
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the official Incoterms® definitions commentary, published by ICC.4 Some of the
clauses are no longer part of the Incoterms® 2010 rules, but may still have some
practical importance; thus they are also discussed.
6.3.2.1 EXW (Ex Works)
Incoterms® 2010 rule applying to any mode of transport. “Ex works” means that
the seller’s only responsibility is to make the goods available at his premises or
at another named place (i.e. works, factory, warehouse). In particular, the seller
is not responsible for loading the goods onto the vehicle provided by the buyer,
unless otherwise agreed, nor does he need to clear the goods for export, where
such clearance is applicable. The buyer bears the full cost and risk involved in
bringing the goods from there to the desired destination. This term thus represents the minimum obligation for the seller.
6.3.2.2 FCA (Free Carrier – Named Point)
Incoterms® 2010 rule applying to any mode of transport. This term has been
designed to meet the requirements of modern transport, particularly such “multi-­
modal” transport as container or ro/­ro traffic by trailers and ferries. It is based on
the same main principle as FOB, except that the seller fulfils his obligations when
he delivers the goods into the custody of the carrier at the named point. The parties are advised to specify as clearly as possible the point within the named place
of delivery, as the risk passes to the buyer at that point. If no precise point can be
stipulated at the time of the contract of sale, the parties should refer to the place
or range where the carrier should take the goods into his charge. The risk of loss
or damage to the goods is transferred from seller to buyer at that time and not at
the ship’s rail. When the seller has to furnish a bill of lading, waybill or carrier’s
receipt, he duly fulfils this obligation by presenting such a document issued by a
person so defined.
6.3.2.3 FAS (Free Alongside Ship)
Incoterms® 2010 rule applying only to sea and inland waterway transport. Under
this term the seller’s obligations are fulfilled when the goods have been placed
alongside the ship on the quay or in lighters nominated by the buyer at the named
port of shipment. This means that the buyer has to bear all costs and risks of loss
or damage to the goods from that moment. It should be noted that, unlike FOB,
the term FAS requires the buyer to clear the goods for export.
6.3.2.4 FOB (Free on Board)
Incoterms® 2010 rule applying only to sea and inland waterway transport. The
goods are placed on board a ship by the seller at a port of shipment nominated by
the buyer at the sales contract. The risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship’s rail, and the
4 International Chamber of Commerce The Incoterms® Rules (www.iccwbo.org, accessed
1 January 2017).
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buyer bears all costs from that moment onwards. A particular variation is “FOB
airport”, where the seller fulfils his obligations by delivering the goods to the air
carrier at the airport of departure.
6.3.2.5 CFR (Cost and Freight)
Incoterms® 2010 rule applying only to sea and inland waterway transport. The
seller must pay the costs and freight necessary to bring the goods to the named
destination, but the risk of loss or damage to the goods, as well as of any cost
increases, is transferred from the seller to the buyer when the goods pass the
ship’s rail in the port of shipment.
6.3.2.6 CIF (Cost, Insurance and Freight)
Incoterms® 2010 rule applying only to sea and inland waterway transport. This
term is basically the same as CFR but with the addition that the seller has to procure marine insurance against the risk of loss or damage to the goods during the
carriage. The seller contracts with the insurer and pays the insurance premium.
Under CIF the seller is required to obtain insurance only on minimum cover.
Should the buyer wish to have more insurance protection, it will need either to
agree it as much expressly with the seller or to make its own extra insurance
arrangements.
6.3.2.7 CPT (Freight or Carriage Paid to – Named Place)
Incoterms® 2010 rule applying to any mode of transport. Like CFR, “freight or
carriage paid to” means that the seller contracts and pays the freight for the carriage of the goods to the agreed destination (nominated by the seller). However,
the risk of loss or damage to the goods, as well as of any cost increases, is transferred from the seller to the buyer when the goods have been delivered into the
custody of the first carrier and not at the ship’s rail. It can be used for all modes
of transport including multi-­modal operations and container or ro/­ro traffic by
trailers and ferries. When the seller has to furnish a bill of lading, waybill or carrier’s receipt, he duly fulfils this obligation by presenting such a document issued
by the person with whom he has contracted for carriage to the named destination.
6.3.2.8 CIP (Freight or Carriage and Insurance Paid to – Named Place)
Incoterms® 2010 rule applying to any mode of transport. This term is the same
as “freight or carriage paid to”, but with the addition that the seller has to procure
transport insurance against the risk of loss or damage to the goods during the
carriage. The seller contracts with the insurer and pays the insurance premium,
having also a minimum cover obligation.
6.3.2.9 DAF (Delivered at Frontier)
Incoterms® 2000 rule. “Delivered at frontier” means that the seller’s obligations
are fulfilled when the goods have arrived at the frontier – but before “the customs border” – of the country named in the sales contract. The term is primarily
intended to be used when goods are to be carried by rail or road, but it may be
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used irrespective of the mode of transport. Note that this clause is no longer a
part of the current Incoterms® definitions.
6.3.2.10 DAP (Delivered at Place)
Incoterms® 2010 rule applying to any mode of transport. The seller delivers
when the goods are placed at the disposal of the buyer on the arriving means of
transport ready for unloading at a named place of destination. The seller bears all
risks involved in bringing the goods to the named place and then are taken over
by the buyer.
6.3.2.11 DAT (Delivered at Terminal)
Incoterms® 2010 rule applying to any mode of transport. Similar to DAP, but the
seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port
or place of destination. The seller bears all risks involved in bringing the goods
to and unloading them at the terminal at the named port or place of destination.
6.3.2.12 DES (Delivered ex Ship)
Incoterms® 2000 rule. The seller makes the goods available to the buyer on board
the ship at the destination named in the sales contract. The seller has to bear the
full cost and risk involved in bringing the goods there. Note that this clause is no
longer a part of the current Incoterms® definitions.
6.3.2.13 DEQ (Delivered ex Quay)
Incoterms® 2000 rule. The seller makes the goods available to the buyer on the
quay (wharf ) at the destination named in the sales contract. The seller has to bear
the full cost and risk involved in bringing the goods there.
There are two “ex quay” contracts in use, namely “ex quay (duty paid)”, and
“ex quay (duties on buyer’s account)”, in which the liability to clear the goods
for import are to be met by the buyer instead of by the seller. Parties are recommended always to use the full descriptions of these terms, namely “ex quay (duty
paid)” or “ex quay (duties on buyer’s account)”, or else there may be uncertainty
as to who is to be responsible for the liability to clear the goods for import. Note
that this clause is no longer a part of the current Incoterms® definitions.
6.3.2.14 DDU (Delivered Duty Unpaid) and DDP (Delivered Duty Paid)
The former is an Incoterms® 2000 rule and the latter is an Incoterms® 2010
rule applying to any mode of transport. While the term “ex works” signifies the
seller’s minimum obligation, the term “delivered duty paid” followed by words
naming the buyer’s premises denotes the other extreme; the seller’s maximum
obligation. The seller delivers when the goods are placed at the disposal of the
buyer, cleared for import on the arriving means of transport ready for unloading
at the named place of destination. The seller bears all the costs and risks involved
in bringing the goods to the place of destination and has an obligation to clear the
goods not only for export but also for import, to pay any duty for both export and
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import and to carry out all customs formalities. If the parties wish that the seller
should clear the goods for import but that some of the costs payable upon the
import of the goods should be excluded – such as value added tax (VAT) and/­or
other similar taxes – this should be made clear by adding words to this effect
(e.g., “exclusive of VAT and/­or taxes” ). Note that DDU is no longer a part of the
current Incoterms® definitions.
6.4 Documentary Letter of Credit
6.4.1 Introduction
Except for cash in advance, the export letter of credit (L/C) gives the seller the
highest degree of financial protection among all the commonly used methods of
payment for exports. A letter of credit is essentially an undertaking by the buyer’s
bank that, upon the instructions of the buyer, it will pay the agreed amount to the
seller/­exporter (the “beneficiary”) against the latter’s provision and presentation
of certain agreed documents, for example the invoice, the transport documents
etc. When a letter of credit is issued in an international transaction, at least two
banks are normally involved. Typically, one bank is in the buyer’s/­importer’s
country, called the “opening bank” or the “issuing bank”, which undertakes to
establish (open) the letter of credit in favour of the beneficiary, forward it to the
bank of the beneficiary and commit itself to honour demand drafts drawn by
the beneficiary against the amount specified in the L/C if the agreed conditions
have been met. The other bank is in the seller’s/­exporter’s country, called the
“advising bank” or the “confirming bank”, which guarantees that the letter of
credit established by the importer will be honoured once the conditions therein
are fully complied with and undertakes this responsibility on an arrangement
called “confirmation”.
The value of the letter of credit to the exporter (seller) is that, when presenting
the prescribed supporting documents, he is entitled to draw drafts on a bank or
to be paid in cash by the bank, and thereby he receives the agreed payment for
the goods.
The basis for the whole transaction is the sales agreement. It generally follows
from the sales agreement that the goods have to be paid for, they have to be
moved from the seller to the buyer and they have to be insured in accordance with
the terms and conditions of the purchase agreement. Depending on the transportation clause used (e.g. FOB, CIF or other Incoterms® rules), the seller or
the buyer, as the case may be, will be obliged to arrange insurance and carriage
and pay for them. If the parties to the sales agreement have agreed that payment
shall be made by a letter of credit, a basic precondition of the seller’s obligation to deliver the cargo is that the buyer will have arranged with a bank – in a
timely manner – to open the documentary credit. This letter of credit shall almost
invariably be an irrevocable letter of credit (ILOC ). Under an irrevocable letter
of credit, the issuing (or confirming) bank undertakes and guarantees to pay the
seller, if the documents presented meet the requirements of the letter of credit. An
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irrevocable letter of credit cannot be cancelled, nor in any way modified, except
with the explicit agreement of all parties involved; the buyer, the seller and the
issuing bank. For example, the issuing bank does not have the authority by itself
to change any of the terms of an ILOC once it is issued. The buyer’s financial
protection lies in the fact that the bank will pay under the documentary credit
only if the seller presents documents which contain information and particulars
in conformity with the documentary credit provisions. The general idea is that
all documentation will be synchronised (sales agreement, letter of credit, bill of
lading and insurance documents).
Because a letter of credit is typically a negotiable document, the issuing bank
pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit
is transferable, the beneficiary may assign the right to draw to another entity,
e.g. a corporate parent or a third party. A transferable letter of credit permits the
beneficiary of the letter to make some or all of the credit available to another
party, thereby creating a secondary beneficiary. The issuing bank must approve
the transfer. The carrier’s demand for freight may sometimes be secured by the
use of a transferable credit, whereby part of the original transferable letter of
credit will be available for payment to the carrier under a separate credit.
The sales/­purchase agreement is thus the source of several ancillary contracts
setting out various obligations to different parties. The buyer will have to arrange
an agreed or customary type of documentary credit at the agreed time and with
a first-­class (or named) bank, and the provisions of the documentary credit must
correspond with those agreed in the purchase agreement. The purchase agreement should thus contain an explicit provision in respect of the letter of credit,
its type, the time for opening, the expiry date etc. Furthermore, the documentary
credit normally makes reference to the “UCP” (Uniform Customs and Practice
for Documentary Credits) to be followed, meaning a universal set of rules on the
issuance and use of letters of credit. The UCP standard is utilised by bankers and
commercial parties in trade finance almost all over the globe. This standard has
been established by the ICC (International Chamber of Commerce) by publishing
the first UCP in 1933 and subsequently updating it throughout the years. The latest version is the sixth revision of the rules, which was published in 2006 and is
called “UCP 600”5 (see section 6.5.3.3). The UCP rules have gained worldwide
recognition and use in the field of international trade.
Very often the payment clause in the sales agreement is not very elaborate and
may give rise to a number of problems. It is therefore necessary for the beneficiary, immediately upon receipt of the documentary credit, to make a thorough
check of its provisions and reject it if it is not in conformity with the purchase
agreement or with his understanding of it.
Under an irrevocable letter of credit the bank instructed by the buyer undertakes to pay the seller when he has performed his part of the deal, which he will
do by presenting the documents prescribed in the letter of credit, normally at least
5 International Chamber of Commerce ICC’s New Rules on Documentary Credits Now Available
(www.iccwbo.org, accessed 4 December 2006).
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an invoice, an insurance policy and, if an ocean carriage is involved, a bill of
lading. From the seller’s point of view the bill of lading is essential, since it gives
him a right to assert and support delivery of the goods at the port of discharge,
while from the buyer’s side the bill of lading is also important since it contains
information related to the goods (type, quantity, loading time, loading condition
etc.), which form documentary evidence of the goods bought. The bill of lading
“representing” the cargo, together with the insurance policy, is what the buyer
pays for. The buyer’s bank will take up the documents from the seller, on behalf
of the buyer, which can be used as the basis for further transactions or as financial
security for the financing bank.
It is thus evident that the documents used in international sales contracts play a
significant role both in the relationship between the seller and the buyer, as well
as between the carrier and the shipper/­consignee. This is particularly true for the
bill of lading which is often described as a document of title and used to enable
consignor and consignee to deal in the goods being carried. The carrier is lawfully in possession of the goods of another party, and he is sometimes described
in legal terms as a bailee. The important role of the bill of lading also means that
far-­reaching and unpredictable liability exclusions on the part of the carrier may
impair the interest of the consignee to receive cargo of the right kind, weight,
quantity and condition. This also means that there may be a discrepancy between
the description of the goods in the bill of lading and the actual quantity and state
of the goods upon delivery to the consignee. Such discrepancy may cause loss to
one or more of the parties involved (the bill of lading will be discussed further
below in section 6.4.3).
6.4.2 How the documentary credit works
The principal advantages connected with the use of a documentary credit are the
following:
• the buyer shall not have to make any payment until and unless the goods
are shipped and evidence to this effect is produced by means of the
documents which are to be surrendered, according to the documentary
credit being based on the presentation of a clean shipped bill of lading
to the paying bank; and
• the seller is in a position to proceed with the execution of the order and
the shipment of the goods as soon as he is in possession of the advice
that the documentary credit has been established by the buyer’s bank.
On the strength of an irrevocable documentary credit, the seller (beneficiary) is assured of payment by the bank, upon due presentation of the
documents, provided that they are in conformity with the terms of the
letter of credit and the UCP.
The handling of a documentary credit involves a minimum of three, but in
many cases four, parties as Figure 6.3 illustrates.
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Figure 6.3 Documentary Credit Process
When the parties to a business transaction agree to payment terms involving
a documentary credit, the buyer instructs his bank to open a credit in favour of
the seller and to advise the latter to this effect either directly or through a correspondent bank (which will be either an advising bank or a confirming bank) in
the country of the seller.
When the terms and conditions of the purchase contract provide that payment
shall be made by irrevocable documentary credit, the buyer arranges with his
bank for the issuance (“opening”) of the required credit. The buyer informs its
bank of the nature of the transaction and the amount to be paid, gives a brief
description of the merchandise to be shipped, specifies the documents required
as evidence of shipment and sets an expiration date for the credit. On the basis
of this information, the bank issues the irrevocable letter in a form that meets the
requirements of the sales contract.
The issuing bank normally uses a correspondent bank, in the exporter’s country,
and the next step will thus be that the issuing bank instructs its correspondent bank
to advise the beneficiary that the letter of credit has been established. The importer’s
bank may also request its correspondent to confirm the letter of credit; such confirmation binds the correspondent bank as well as the importer’s bank to honour the
credit. Alternatively, the importer’s bank may request the correspondent bank itself
to open the letter of credit, in which case only the correspondent bank is bound.
It should be pointed out that, instead of using letters of credit, the parties to
an export transaction may agree that the buyer arranges for the issuance of an
on-­demand guarantee or a standby letter of credit (SLOC ), which will serve as
financial security in case the buyer is defaulting on payment.
6.4.3 Documents required in the documentary credit
The payment clause in the sales contract, depending on the payment method
used, may prescribe along the following lines:
“Payment in the amount of USD . . . shall be made by irrevocable letter of credit
opened by X bank not later than Y day. The letter of credit shall be valid until and
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including Q day. Payment shall be available against beneficiary presenting the following documents:
(a) Invoice; (b) Marine and War Risk Insurance Policy (Certificate) covering
110% of the CIF value of the goods; (c) Full set of clean “on board” (or “received
for shipment”) Bills of Lading to order, evidencing shipment from Tokyo to Gothenburg latest 30th June 2017, and marked “Freight paid”; (d) Certificate of Origin
in duplicate; (e) Weight Note in duplicate. The letter of credit shall be subject to
UCP 600 ”.
The letter of credit should mirror the terms and conditions of the sales agreement.
The documentary credit transaction is based on the idea that the bank pays the
agreed amount to the beneficiary after it has examined the documents presented
and found them to be in accordance with the terms and conditions of the documentary credit and with UCP. The duty to examine the documents submitted to
the bank gives to the buyer some certainty that the goods covered by the particular bill of lading are the goods purchased under the contract of sale. If the
examining bank is negligent when carrying out the examination, this may have
an effect on the buyer (and consequently on the seller/­beneficiary for that matter). Following the UCP, the bank therefore has a duty to use due diligence in its
examination of the documents presented. It should be emphasised that the bank
only examines the documents; the bank is not liable for the actual quality, quantity and condition of the goods, nor the authenticity of the documents, but only
for their accuracy, that is that they correspond to the requirements of the letter of
credit (see also sections 6.5.3.3 and 6.5.4).
Thus, the bank has a duty to follow carefully the individual instructions as
well as the provisions of the UCP, and it may have a certain liberty within strict
limits to make the examination at its own discretion in order to avoid problems.
Should the bank be negligent, it may be liable in damages to the beneficiary or
to the buyer, as the case may be. In cases of fraud the bank will have no liability
for having paid the beneficiary unless it is aware of such fraud. Under such circumstances the bank may be relieved of its duty to pay under the documentary
credit. During recent years the instances of documentary credit fraud seem to
have increased.
6.5 Carriage of goods by sea, transport documents and bill of lading
At this point, emphasis will be given to a crucial part of international transport
practice and law; the carriage of goods by sea conventions will be examined and
the critical functions of bills of lading and other transport documents will be
highlighted. These aspects are closely inter-­related and essentially affect chartering and charterparty matters.
6.5.1 Introduction to the carriage of goods by sea international conventions
Over the years, four major sets of international rules have been established to
govern the international carriage of goods by sea. As reference will be made to
them throughout the following course of the chapter and the rest of the book, a
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brief description of the sea transport “cargo conventions” is introduced below6
(this is mainly sourced by the Standard P&I Club commentary, further analysis
follows in section 6.6.2):
• The “Hague Rules” (formally the “International Convention for the
Unification of Certain Rules of Law relating to Bills of Lading, and Protocol of Signature”) represented the first attempt by the international sea
transport community to establish a workable and uniform set of rules
governing the carriage of goods by sea and identifying the rights and responsibilities of carriers and owners of cargo. These Rules were published in
1924 following an international convention and were subsequently given
the force of law in many maritime countries. It is the first effort to impose
minimum standards upon commercial carriers of goods by sea, on an international basis, while previously only common law or national statutes
(e.g. the Harter Act in the USA) provided protection to cargo-­owners.
• The “Hague-­Visby Rules” (officially the “Protocol to Amend the
International Convention for the Unification of Certain Rules of Law
Relating to Bills of Lading”) was an agreement to amend the Hague
Rules. The first protocol amendment was made in 1968, whilst a second and final protocol was made in 1979. The Visby amendment to the
Hague Rules added two main elements; an increase to the limitation
of liability amounts and a specific provision of limitation relating to
containers. Many countries declined to adopt the Hague-­Visby Rules
and stayed with the 1924 Hague Rules, whereas some other countries
which upgraded to Hague-­Visby then did not adopt the 1979 SDR protocol. The “Carriage of Goods by Sea Act (COGSA) 1971” incorporated
the Hague-­Visby Rules into English Law. The subsequent “Carriage
of Goods by Sea Act (COGSA) 1992”, even though not amending the
Hague-­Visby Rules, upgraded the status of a bill of lading to be conclusive evidence of receipt for shipment.
• The “Hamburg Rules” (officially the “United Nations Convention on
the Carriage of Goods by Sea”) were adopted in 1978. The Rules sought
to redress the apparent imbalance between carriers’ and shippers’ interests by adopting a new approach to cargo liability where the carrier
is held responsible for the loss of or damage to goods whilst in their
charge, unless they can prove that all reasonable measures to avoid
damage or loss were taken. The convention entered into force in 1992
when the pre-­requisite number of countries acceded to the convention.
However, these Rules have proved unpopular, as many of the world’s
trading nations failed to sign up.
• The “Rotterdam Rules” (formally, the “United Nations Convention on
Contracts for the International Carriage of Goods Wholly or Partly by
Sea”) is a treaty comprising international rules that revise the legal and
6 The Standard Club Cargo Conventions (www.standard-­club.com, accessed 6 January 2017).
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political framework for maritime carriage of goods. The convention
attempts to establish a comprehensive, uniform legal regime governing
the rights and obligations of shippers, carriers and consignees under a
contract for door-­to-­door shipments that involve international sea transport. The stated aim of the convention is to extend and modernise international rules already in existence and achieve uniformity of admiralty
law in the field of maritime carriage, by updating and/­or replacing many
provisions in the Hague Rules, Hague-­Visby Rules and Hamburg Rules,
containing among other things some provisions relating to electronic
documents. The final draft of the Rules was adopted by UNCITRAL
(United Nations Commission on International Trade Law) in 2008.
Signatories included countries said to make up 25% of world trade by
volume. However, as of October 2015 the Rules had not yet come into
force as they had only been ratified by three states – 20 states have to
ratify in order for the Rules to come into effect.
6.5.2 Relationship between carriage of goods by sea and other
means of transportation
In modern international trade it is increasingly common that the goods are carried not only by sea, but also by an additional mode of transport (this is the idea
behind the “Rotterdam Rules”). This occurs on a daily basis with respect to containerised cargo which is carried by sea, but also by road/­railway before and/­or
after the sea transport. The sea leg is often the most significant part (at least the
longest one) and in such a case the carriage by road and/­or by railway is a carriage
which is ancillary to the carriage by sea. There has been a recognised need for
uniform rules applicable to the carriage by sea and to the carriage by other modes
preceding or following the sea transport. This is due to the fact that in many cases
no inspection is carried out with respect to the condition of the containers either
at the commencement or at the end of the sea leg. Therefore, it is far simpler and
clearer for all parties to the contract of carriage if the condition of the goods is
established when the containers are taken in charge by the carrier, whether this
takes place inland or in a port or in the place where the goods are handed over by
the carrier to the consignee, irrespective of where this takes place.
Ever since efforts were made to introduce a new separate convention on multi-­
modal transport, there has been a problem in finding a common solution which
could be acceptable to all the different legal regimes in use. The problem is,
among other things, whether the same rules concerning the liability of the carrier
should apply throughout the whole transport, or whether particular rules should
apply only with respect to that particular part of the combined transport where
the damage occurred. One difficulty which has been identified is the method of
applying universally agreed evidence rules, i.e. to define exactly where the actual
damage took place, how liability is allocated and who is responsible. The second
problem comes from the fact that the liability rules are different among ocean,
road and railway carriage worldwide. Thus, failing to find an internationally
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accepted solution in legislation, the involved parties have instead tried to work
out practical alternatives. The use of the ICC rules on combined transport or other
individual agreements are such practical solutions usually followed.
6.5.3 Bill of lading and other transport documents
The bill of lading is the best known ocean transport document still in use. It has a
very long heritage dating back to the old “lex mercatoria” or the “Roman times”.
The need for the bill of lading arose when merchants first decided that they would
no longer accompany their goods during maritime transport but, instead, placed
them in the custody of the master for transportation to overseas destinations and
then sent the bill of lading by another ship in order for it to reach the buyer, so
that he would be able to present it and receive the goods. This sea journey became
unnecessary with the development of ever faster mail and courier services.
While the charterparty (C/P ) is the document which embodies the written
form of the vessel’s charter agreement, containing the terms and conditions which
govern the relationship between the shipowner and the charterer, the bill of lading (B/L) is that transport document which relates to the cargo carriage, governs
the relationship between the shipper and the carrier and it is issued either upon
the goods being received for shipment (received for shipment bill of lading) or,
traditionally, upon their shipment on board the ship (shipped bill of lading).
The bill of lading, in practice often filled in by the shipper or by a forwarding agent, is issued and signed by a representative of the carrier/­shipowner, for
instance the master of the vessel or the owner’s agent. Instead of that, the charterparty may sometimes stipulate that the charterer’s agent will sign the bill of
lading. From the owner’s point of view it is then important that the bill of lading
shall be in conformity with the mate’s receipt and the cargo manifest.
A mate’s receipt is issued by the mate of the vessel after the cargo has been
tallied into the ship by tally clerks. In a charterparty a clause will require the
master to sign bills of lading in accordance with mate’s receipts. For example, the
NYPE 2015 form, clause 8(a) “performance of voyages” (see appendix 6) states
that “Charterers shall perform all cargo handling, including but not limited to
loading, stowing, trimming, lashing, securing, dunnaging, unlashing, discharging, and tallying, at their risk and expense, under the supervision of the Master”,
while it complements further in clause 31(a) “bills of lading” that “. . . the
Master shall sign bills of lading or waybills for cargo as presented in conformity with mates’ receipts”. A copy of the “mate’s receipt” will be given to the
shipowner, and the bill of lading will be given to the shipper. The bill of lading
acknowledges that the goods have been “shipped in apparent good order and
condition” if the “mate’s receipt” is clean. Otherwise, comments are transferred
to the bill of lading.
The complete list of cargo loaded, as compiled from the bill of lading, forms
the cargo manifest of the ship issued by the port agent. Customs regulations at
most ports require at least one copy of the manifest. Copies of the cargo manifest
are also required from stevedores at discharging ports.
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The bill of lading is sent to the shipper usually after the goods have been loaded
on board the vessel. The shipper, after examining the content of the bill of lading,
forwards the original bill of lading to the cargo owner. A properly endorsed original bill of lading is a negotiable instrument carrying the right to demand and have
possession of the goods described in it. Provided they have no notice of any other
claim to the goods, the agent of the vessel is justified in delivering the goods to
the first person who presents the original bill of lading to him.
The cargo owner or his forwarding agent shall, as holder of the bill of lading, present himself to the shipping agent and receive the delivery order and the
necessary information regarding the quay and the time where the goods will be
discharged. Upon arrival of the goods and after payment of the reception costs
and eventually of the freight, the cargo receiver presents the delivery order to the
person in possession of the goods (i.e. the carrier or a warehouseman), directing
that person to deliver the cargo to himself, as being the person named in the order.
In liner trading, where numerous bills of lading are issued, the traditional
signature has been increasingly replaced by electronic means, such as facsimile
signature, perforated signature, stamp, symbol or any other method of mechanical or electronic authentication.
In general, a bill of lading contains all the information that serves to identify
the carriage and the cargo, such as the name of the shipper of the goods, the name
of the consignee (if known, but quite frequently the bill of lading will be made
out “to order” of a person where in such case the document is negotiable and
might be pledged as security to a bank which has financed the purchase under a
letter of credit), the port of loading, the port of discharge, the name of the ship, a
description of the cargo (e.g. in terms of loading marks, description of packages,
weight or measurement and contents), the amount of freight, as well as the place
and time for payment, etc.
Even in today’s modern transportation, the traditional bill of lading is still the
most used shipping document in bulk and oil transportation, basically serving
three main purposes:
(1) the bill of lading is the master’s confirmation that he has received or
shipped on board goods in a certain quantity and condition;
(2) the bill of lading is (prima facie or conclusive) evidence of the contract
of carriage between the shipper and the carrier; and
(3) the bill of lading is a negotiable document of title enabling the seller, who
has shipped the goods for delivery to the buyer, to transfer the right to
obtain delivery of the goods to the buyer or the holder of the document.
It is obvious that all three main functions aim to link crucial information and
rights deriving from the contract of carriage as well as from the contract of sale,
allowing the consignee/­receiver to be in a position to collect the cargo at the place
of destination.
Transport documents need certain legal qualities in order to meet all the above-­
mentioned requirements. Such documents which meet all three requirements
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provide the holder with the right to take delivery of the goods and entitle the
holder of the documents to dispose of the goods while in transit. They are often
considered to be “documents of title” as they are “negotiable documents” (or at
least “quasi-­negotiable”). This means that such documents represent the cargo and
may be traded. This is the case with the traditional bill of lading. However, to an
ever-growing extent, the traditional bill of lading in modern cargo transportation
has been replaced by a “sea waybill” or by other documents which do not have the
same legal qualities as the bill of lading (e.g. consignment notes, waybills).
The bill of lading may be made out “to a named person”, “to a named person
or order”, “to the holder” or “to a named person not to order”. In the first three
cases the bills of lading are regarded as “negotiable” or “quasi-­negotiable” documents of title (except in the United States where in some cases the first one is
not). On the other hand, consignment notes and waybills set out the name of the
party entitled to receive the goods mentioned in the document and also identify
the type and quantity of the goods, but they are not negotiable documents and
thus they are not documents of title. Increasingly, sea waybill has replaced the
traditional bill of lading as the main transport document in ocean carriage.
A consignment note is a transport document containing particulars of goods for
shipment, prepared by a consignor and countersigned by the carrier as a proof of
receipt of consignment for delivery at the destination. It is an alternative to the
bill of lading (especially in inland transport), however, without being either a contract of carriage or a document of title, it is therefore a non-­negotiable instrument.
A waybill is a transport document that travels with a shipment, identifies its
consignor, consignee, origin and destination, describes the goods and shows their
weight and freight. It is prepared by the shipping company (carrier) for its internal record and control, without being either a contract of carriage or a document
of title, therefore it is not a negotiable instrument.
A seawaybill or sea waybill is a transport document that serves as evidence
of the contract of carriage and as a receipt of cargo taken “on board” a vessel.
Unlike a bill of lading, the sea waybill is a non-­negotiable form of bill of lading
(thus not a document of title) where delivery is to be made to the named consignee. The named person, not the holder of the document, is here entitled to
claim delivery of the goods. In practice this is typically the case when electronic
documentation is being used. Furthermore, the sea waybill is used in many trades
(such as the container trade) where it is not expected that the goods will be resold
while afloat. The use of the traditional bill of lading can cause problems if the
goods reach the port of discharge before the bill of lading comes into the hands of
the buyer. The latter will only be able to persuade the shipowner to deliver if he
provides a suitable guarantee to indemnify the shipowner against any misdelivery claims. Apart from the inconvenience caused by arranging such guarantees,
there will also be some cost involved for the buyer if the shipowner insists on a
bank providing the guarantee. The above-mentioned problems can be avoided by
using a sea waybill.7
7 Baughen, S. (2015) Shipping Law (Routledge, 8th edition, p. 8).
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Although the term “bill of lading” is well-­established in international trading
practice, it would not be impossible if it became obsolete in the years to come.
The Rotterdam Rules (article 1.14) introduce the new general term “transport
document” as follows8:
“Transport document means a document issued under a contract of carriage by the
carrier that:
(a) Evidences the carrier’s or a performing party’s receipt of goods under a contract of carriage; and
(b) Evidences or contains a contract of carriage ”.
It becomes clear that, according to this definition, modern transport documents (whether bills of lading or sea waybills) should share only two out of three
basic functions of a traditional negotiable bill of lading. The third function of a
“negotiable document of title” is connected only with the traditional bill of lading
which is generally “a negotiable instrument, entailing the right to demand the
goods described therein and to take possession of them”. If a “bill of lading” is
declared to be “non-­negotiable”, then it should be treated as a sea waybill.
Therefore, assuming the Rotterdam Rules come into force, it remains to be
seen how trading practice will be transformed in the future. For someone to conceive this evolution, it is worth reading also other interesting definitions of the
Rotterdam Rules (article 1: “contract of carriage”, “liner transportation”, “carrier”, “performing party and maritime performing party”, “shipper and documentary shipper”, “holder”, “consignee”, “negotiable and non-­negotiable transport
document”, “electronic communication and electronic transport record”, etc.).
In liner shipping, the bill of lading (or substitute documents/­methods) is the
main document regulating the relationship between the carrier, the shipper (frequently the customer) and the consignee. The cargo carriage is normally booked
by telephone or e-­mail, sometimes resulting in a booking note (see appendix 11)
whereby the agent of the carrier promises space to the customer in a particular
vessel and/­or within a certain period of time. The bill of lading will thereafter
be issued upon the shipment of the cargo (shipped bill of lading) or upon receipt
thereof (received for shipment bill of lading).
In bulk/­tramp shipping, the vessel’s charter relationship is regulated in a charterparty signed by the charterer and the shipowner. The bill of lading will first
be a receipt for the goods shipped, but then it will retain its other functions to a
large degree, particularly in relation to the “bona fide” third party (consignee)
who acquires the bill of lading in good faith so as to receive the goods. The bill of
lading may also refer to the charterparty as the underlying document.
It has already been mentioned that a sale and purchase of goods typically
forms the basis of, inter alia, the contract of carriage. In the sales contract the
parties normally agree on whether the seller or the buyer will arrange and/­or
pay for the transportation and other ancillary costs, as well as take on certain
8 United Nations (2008) United Nations Convention on Contracts for the International Carriage
of Goods Wholly or Partly by Sea (Rotterdam Rules).
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risks related with the sales transaction. The so-­called “transport clauses” (see
above Incoterms® definitions) are therefore of importance in the transportation
relationship, particularly since the carrier will have to deal with the shipper, the
consignee and the charterer.
A large number of bill of lading clauses govern the carrier’s (shipowner’s)
relationship with the shipper and the consignee. Whether freight will be payable
in advance or at a later stage is very important from a seller/­buyer point of view.
In a CIF transaction the seller has an obligation to pay the freight, in which case
the bill of lading should thus be marked “freight prepaid ”. However, practical
problems may occur in an FOB sale, when the different parties have not made
clear that the shipper is not entitled to ask for a bill of lading freight prepaid, as
long as in an FOB sale it will be the buyer who pays for the freight.
Due to this relationship between the seller and the carrier, in case of a negotiated bill of lading, the holder of the bill of lading which is a “bona fide” third
party (i.e. acting in good faith and unless he is both the shipper of the bill of
lading and the charterer of the charterparty) will be typically protected by mandatory rules to avoid the carrier exempting himself from his responsibilities with
regard to the cargo liability. Such legislation, based on international conventions
(e.g. Hague Rules, Hague-­Visby Rules, Hamburg Rules and Rotterdam Rules,
see section 6.5.1), aims at placing on the carrier a minimum liability for damage
to, or loss of, the cargo. This mandatory legislation (commonly the Hague-­Visby
Rules) may be incorporated in a charterparty by a specific clause. In such a situation the carrier may be vested with a more far-­reaching liability than he would
have had under the charterparty.
It is important that the terms and conditions of the bill of lading and the charterparty are synchronised as far as possible. Otherwise the result may be that the
carrier may become liable for damage to cargo under the bill of lading without
being able to invoke agreed exemptions under the charterparty or to seek redress
from the charterer. Correspondingly, imbalances may appear if laws of different
countries apply to the different agreements.
The carrier (shipowner) usually tries to make the terms and conditions of the
charterparty applicable to the bill of lading by reference to the charter, for example by stamping on the bill of lading a clause of the following type:
“This bill of lading shall be subject to the terms and conditions of charterparty
between . . . and . . . dated. . . .”.
Frequently, the seller of goods is not prepared to accept such a clause because,
when payment is to be made under a documentary credit, the paying bank may,
following the provisions of UCP, refuse to accept a bill of lading making reference to a charterparty, unless it has been expressly instructed to accept such a bill
of lading.
Bills of lading and other transport documents are printed documents. BIMCO
has designed various standard forms of bills of lading, such as the general purpose Congenbill (see appendix 13 for the latest version of 2016) and the liner
Conlinebill (see appendix 14 for the latest version of 2016).
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The following sections will discuss more specifically the functions and the
importance of a traditional bill of lading.
6.5.3.1 Bill of lading as a document of title
The particular challenge in maritime transport is that a trader may want to be
able to buy a cargo overseas, have it shipped on board a vessel and then, while
the goods move over the oceans towards their overseas destination, look to sell
to another trader or an ultimate receiver. He may not be planning to take actual
physical delivery himself, but sell the cargo in order to make some trading profit.
In order that the buyer does not have to wait for the actual arrival of the vessel at
the port of discharge before being able to resell the cargo, the transport document
(typically a bill of lading) has developed into a document of title over time. The
traditional bill of lading, usually called an “order” bill of lading, is recognised as a
negotiable or at least a quasi-­negotiable document. This means that, by transferring
the document to a third party, all rights deriving from the bill of lading are transferred to the new holder of the document. Since it is a traditional principle of maritime law that the carrier is only obliged to deliver the goods to the holder of a bill of
lading, the actual holder of the document is entitled to have delivery of the goods.
Moreover, the holder of a full set of bills of lading is authorised to deal with
the goods (right of disposal/­right of instructions) while they are still on board the
vessel. This is particularly important when agreeing with the carrier to change
the port of discharge.
Furthermore, a second type of bill of lading that can perform as document of
title is the “straight” bill of lading which is issued to a named consignee. In this
case, however, the bill of lading is not a negotiable document, thus it is a document of title only for the one specific consignee indicated on the document.
To put it simply, the “bill of lading confers prima facie title over the goods to
the named consignee or the lawful holder”.
Due to technical improvements and speedier services in the maritime industry,
it frequently happens that the vessel arrives at its destination before traders are
able to negotiate the documents through the L/C channels. The goods will therefore reach the port of discharge before the documents arrive, creating a lot of
problems that have to be sorted out.
6.5.3.2 Bill of lading as a confirmation of receipt of goods for transport
The bill of lading as evidence for the quantity and condition of the goods
One of the traditional functions of a bill of lading is to evidence the exact quantity and the apparent condition of the goods at the time of delivery to the carrier.
Once the carrier has stated the quantity and condition in the receipt, which in this
context means the bill of lading, then it is assumed that the goods were in fact
given to him in this quantity and in the condition stated. If the cargo is found to
be in good order and there is no remark entered into the bill of lading, it will be a
so-­called “clean bill of lading”.
The reason behind the need of such a clean bill of lading is for the merchant
(consignee) to prove the so-­called prima facie case leading to a presumed liability
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of the carrier under the current international cargo conventions (see 6.5.1). Thus,
the receipt function of the bill of lading becomes a crucial instrument of the shipper and/­or the consignee when claiming compensation in the context of maritime
claims, because the information given in the transport document is presumed to
evidence the true nature/­quantity of the goods.
The bill of lading as proof of delivery of the goods in conformity with the
contract of sale
The receipt function of the bill of lading has thus great implications in the context
of an international sale. When receiving the bill of lading (which states the condition and quantity of the goods), the shipper, who is often at the same time the
seller under the contract of sale, is able to prove to the buyer that he has in fact
delivered the goods in full conformity with the contract of sale.
This is important in many contexts, and as indicated above it becomes crucial
where the payment for the goods is being made by letter of credit, since the bill
of lading is often one of the relevant documents to be presented by the seller
(beneficiary) for payment by the letter of credit bank. A bill of lading which
gives description of the goods which is not in conformity with the provisions of
the letter of credit, or a bill of lading with remarks making it unclean will not be
accepted by the bank.
A bill of lading established by the master with some reservations regarding the
apparent condition or quantity of the goods will thus greatly affect the trading
value of the document. This is because the document is no longer “clean” and will
cause some problems for the shipper when negotiating it through the L/C channel.
This is where the use of letters of indemnity (LOI) have come up in international
trade. The importance of a clean bill of lading is analysed further in section 6.5.3.3.
Mandatory content of a bill of lading
As a consequence of this function as a receipt and as a proof of the delivery of
the goods to the carrier, it soon became necessary to establish mandatory rules
obliging the carrier to provide at least minimum information on the “front”
of the bill of lading. This is defined in the cargo liability conventions (Hague
Rules, Hague-­Visby Rules; Hamburg Rules). However, if the latest convention
(Rotterdam Rules) comes into force, covering carriage of goods by sea and ancillary contracts, the use of transport documents will be governed rather by even
more complex and detailed rules, as the new instrument contains clauses which
may have an effect on the value of the bill of lading as a negotiable document.
Regulation is expected to increase with respect to the information given in a bill
of lading or a similar transport document.
“Weight unknown” and “said to contain” clauses
International maritime law has burdened the carrier with the obligation to confirm the quantity and the condition of the goods before he establishes a clean bill
of lading. This duty is in no way unlimited since he is obliged only to state the
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apparent condition of the goods. Where goods are sealed, because they are packaged or containerised, the carrier has of course no realistic means of inspecting
the cargo and thus under most national laws he is allowed up to a certain point
to insert “weight unknown” or “said to contain” clauses in the bill of lading. It
follows that the evidential value of bills of lading containing such clauses is more
limited than if the bill of lading contains clear statements.
Importance of the receipt function for the consignee
If only two parties were involved in the transaction, then the receipt function
of the bill of lading would have been only marginally important. This is because
the receipt would have been only a prima facie evidence that the carrier had
received the goods in that quantity and condition. The actual problem arises in
international trade because the people relying on the statements made in the bill
of lading are often third parties. Thus, the consignee, when receiving a bill of
lading, wishes to rely fully on the statements made by the master because he will
typically release the funds of the contractual sales price to the seller upon transfer
of document as if he had physically received the goods. The same applies in a
letter of credit transaction.
That is why the Hague-­Visby Rules of 1968 state that the carrier will not be
able to disprove the prima facie evidence of the bill of lading towards third parties and will be bound by his statements made in the bill of lading.
6.5.3.3 “Clean” bill of lading and documentary credit
It has been clear that bills of lading and transport documents in general play
a fundamental role in international trade serving important functions in different contractual relations. The basis for the letter of credit transaction is that the
bank pays the agreed amount to the beneficiary after it has examined the documents presented and has found them to be in accordance with the terms and
conditions of the documentary credit as well as with the terms of the applied
UCP set of rules. As already emphasised, the bank examines that the documents
seem correct; the bank has no liability to examine the actual quality, quantity
and condition of the goods shipped, but only to ensure that the documents are
in accordance with the instructions given to the bank. UCP 600 (article 5) states
that “banks deal with documents and not with goods, services or performance
to which the documents may relate”. This setting explains why the information
in the bill of lading is so important in order for the letter of credit transaction to
function. Under a documentary credit transaction most legal problems emanate
from the documents tendered and examined, since they may set out information
which is not in fact correct. It is obvious that the relationship among the sales
agreement, the law of transport and the letter of credit transaction is crucial.
From the buyer’s point of view, it is important that the transport document
gives critical information about the cargo, since the buyer may have only the bill
of lading and the seller’s invoice to rely on when asked to pay. Hence, the buyer
actually pays against the documents without previously having had a chance
to examine the goods. Furthermore, the buyer gets an indication of when the
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goods have been shipped on board or, at least, when they have been received for
shipment.
For the seller/­shipper it is significant to have a clean bill of lading issued
by the carrier – that is a bill of lading which does not contain any remarks
with respect to the condition and quantity of the goods. Otherwise, the buyer
or the paying bank (under a documentary credit) will be entitled to refuse to
pay against a “claused” or “qualified” document when tendered, since such
qualification is an indication that the actual goods do not conform with the
requirements of the sales agreement. Under the terms and conditions of the
sales agreement, the buyer is generally under no duty to pay for an unclean
bill of lading, at least in cases where a remark gives reason to presume that the
goods are not in customary or agreed condition or quantity. Under payment
by documentary credit, UCP 600 (article 27) stipulates that “a bank will only
accept a clean transport document ”. A clean transport document is one bearing
no clause or notation expressly declaring a defective condition of the goods or
their packaging or a shortfall of quantity. The word “clean” need not appear
on a transport document, even if a credit has a requirement for that transport
document to be “clean on board ”.
The seller’s interest in clean bills of lading has thus, in some instances, caused
pressure on the carrier to issue clean bills of lading, although remarks should
be entered with respect to the quantity of the goods or their quality as it appears
(e.g. a box may be torn or damaged by water). The carrier has a duty to note such
remarks in the bill of lading, and under the Hague-­Visby Rules he is not entitled
to produce evidence conflicting with the remarks of the bill of lading against
a third person who has acquired the bill of lading in good faith. The carrier’s
liability for wrong statements in the bill of lading may become extensive. The
various transport conventions have somewhat different solutions in this respect.
In exchange for the clean bill of lading the seller/­shipper may issue a “letter of
indemnity” (LOI ) in favour of the carrier, whereby it assumes liability for all
consequences of the carrier (owner) issuing a clean bill of lading. Such a back-­
letter may have a limited value and it should be underlined that the P&I insurance
does not give the owner any protection in case of damages due to incorrect statements in a bill of lading. The Hamburg Rules and the Rotterdam Rules contain
express provisions in this regard, disallowing the carrier to rely upon the terms
of such indemnity.
6.5.3.4 Bill of lading as evidence of the contract of carriage
The bill of lading is an evidence of the contract of carriage of goods by sea
between the shipper and the carrier. The bill of lading also sets out vital information for the buyer under the sales agreement. Various pieces of information will
be found in the bill of lading, such as type of goods, quantity of cargo, weight,
remarks, destination, name of vessel (in case of on board bills of lading) and
possibly substitution of the vessel, as well as consignee and provisions on liability. All these items are important, not only for the shipper, but probably even
more for the consignee (receiver, buyer) since he will, at the end of the voyage
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and at the port of discharge, claim the goods from the carrier. Again, it is the
third party, namely the consignee, who needs to be able to rely on the contractual
terms entered into between the shipper and the carrier. Due to this need on the
part of the consignee, he, as the buyer of the goods, will require bills of lading
with specific contractual wording and entries when formulating the contract of
sale. Upon discharge of the cargo at the port of discharge the buyer/­consignee is
entitled to receive cargo which is in conformity with the description in the bill of
lading. Failing such conformity, the carrier may be liable in damages according
to the liability regime applicable and the contractual provisions.
When the bill of lading is negotiated to a bona fide third party (consignee),
then the bill of lading becomes conclusive evidence of the contract of carriage.
It is because the third party cannot examine the actual shipment and can only be
based on the transport document itself.
The shipper in its turn needs to present to the consignee or to the L/C bank a
document which is in full conformity with the requirements of the contract of
sale. In order to obtain such a document the shipper may put the carrier under
some commercial pressure, inducing him to enter into the bill of lading certain
information which is not completely truthful, for example an early date for the
issuing of the bill of lading or the note “shipped on board in apparently good
condition” even though it may be suspected or known that a portion of the goods
is damaged or missing. Sometimes, the quantity mentioned in the bill of lading
is not correct. Here again, the carrier induced by this erratic information will ask
for a letter of indemnity as cover for potential liabilities. This practice has been
denounced in many jurisdictions.
6.5.4 Bankability of transport documents
The importance of the bill of lading in international trade has been enhanced in
the context of letter of credit transactions. In overseas trade the bill of lading is
traditionally the key document in the list of documents to be provided under a
letter of credit. As has been illustrated, this is so for a number of reasons. First,
the bill of lading is a document evidencing the receipt of the goods and eventually the shipment on board by the carrier, indicating the condition and the
quantity of the goods at that time. Second, it is a document of title enabling the
rightful holder to claim the goods at destination.
The document and the rights deriving therefrom are transferable to third parties. This means that the bill of lading may be used as financial security for a
bank extending credit to the buyer. Where waybills (e.g. airwaybill, sea waybill,
CMR waybill etc.) are the transport documents used for the transaction, the bank
does not obtain security by holding the waybill, but by being mentioned in the
document as consignee. It is through these functions that banks use the transport
documents as security for the financing of the underlying trade. Because of the
lack of uniformity in this respect, it will depend on the applicable law whether
and to what extent the bank receives financial security over the goods by holding
the documents or by being named as consignee in the bill of lading. Similarly, it
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seems that the use of electronic documents have gradually gained acceptance and
this has also been reflected in the Rotterdam Rules (see section 6.5.7).
6.5.5 Interface between the contract of carriage and sales of cargo
The contract of carriage is ancillary to the contract of sale insofar as the party
requested to provide transportation from the sales contract is the actual party
involved in the contract of carriage. For example, in the traditional FOB clause
the buyer of goods is typically involved in the contract of carriage against the
carrier, while in a CIF clause this role is undertaken by the seller of goods. Transportation of cargo is one of the key elements of performance next to the delivery
of the goods and the payment of the price. However, for the two cardinal performances (delivery of the goods and payment of the price) the contract of carriage
has a crucial function.
As trade and transport have evolved since the creation of the bill of lading,
many functions have been added to its usage. The carrier now certifies (for the
purpose of the sales contract) in a transport document:
(a) the fact that he has received the goods and later that the goods have been
loaded on board;
(b) the date of shipment;
(c) the fact that the goods are of apparent good condition and in the
requested quantity, when received;
(d) that the goods were put on a transportation vehicle/­ship for a contracted
voyage up to the place agreed in the contract of sale; and
(e) the cost of transportation and possibly the distribution of it between the
seller and the buyer (e.g. CAD/­freight prepaid, CIF, CIP etc.).
Further, the contract of sale requires the seller to provide transportation documents, first of all as proof of shipment, but also in order to allow the buyer to
freely trade the goods to third parties. By handing out the transport document,
which first of all should be the document as between the carrier and his contracting party, the carrier becomes (indirectly) highly involved in the underlying transaction, namely the sales contract, without being party to it. The carrier
is also involved in the paramount obligation of the buyer. His document will
trigger the payment by the buyer to the seller, for example, under a letter of
credit.
Finally, in dispute situations between the seller and the buyer, the carrier is
involved; for example, in a buyer’s bankruptcy situation, by the right invoked
by the seller to stop the goods in transit. In disputes regarding the quality of the
cargo, the carrier is involved since the goods may not be accepted for delivery at
the port of discharge.
For these reasons it is evident that there is a close relation between the various contractual relations mentioned, although each of them is particular and
governed by its own contractual and legal rules.
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6.5.6 Types of bills of lading
Summing up at this point, some distinctions may be made among various types
of bill of lading. Traditionally, the shipped bill of lading has been the most common one, a document issued by the master or often in practice by the carrier’s
agent, when the goods have been loaded on board the vessel. Thus, this is a
decisive point with respect to the passing of risk from the shipper to the carrier,
but it may also be important with respect to the relation between the seller and
the buyer.
The received for shipment bill of lading is issued when the goods have been
received by the carrier for loading on a ship. This has come to play a much more
important role where unit transport is involved, particularly container transports
and ro/­ro traffic. The received for shipment bill of lading is issued by the carrier
when the goods have been received at the terminal. Later on, it may be stamped
“shipped ” or “on board ” once the goods have been loaded to the ship.
Carriage of general cargo (mostly containers) is now increasingly performed
in co-­operation among different carriers, who each perform one part of transport immediately following upon the preceding part. Either the same means of
transportation or different modes (e.g. sea, road, rail, air) may be used to perform
the total transport. Terms such as “through transport ”, “combined transport ”,
“intermodal transport ” or “multi-­modal transport ” are used to describe the latter
case, where combined transport documents (e.g. CT bills of lading) are issued,
often electronically. Sometimes, shipping documents may be issued by freight
forwarders (e.g. forwarder’s certificates of transport – FCT), undertaking the
role of the carrier, then often referred to as “Non-­Vessel Operating Common
Carriers” (NVOCC). These developments are particularly important in liner
shipping. It must be pointed out that under through bills of lading, the principal
carrier or freight forwarder who issued the through B/L is liable under a contract
of carriage only for its own phase of the transport journey, acting as an agent for
the carriers executing the other phases. On the other hand, under multi-­modal or
intermodal or combined transport bills of lading the carrier or freight forwarder
who issued the B/L takes on full liability under a contract of carriage for the
entire journey and over all modes of transportation.
Carriage involving several steps or parts may give rise to problems. As the
document covering the whole transport may be issued either by a non-­vessel-­
owning operator or by a freight forwarder conducting business “as a carrier” or
“as agent only for a carrier” or by one of the carriers (e.g. the shipowner), new
documents and procedures have been introduced. Electronic devices (often the
terminology speaks of electronic documents) are frequently in use, not the least
in container transportation. One of the practical problems arising is that different
mandatory rules apply in respect of different means of transport, governing the
relation between the carrier(s) and the cargo owner (the shipper or the consignee
as the case may be).
Another aspect may also have a critical bearing in modern times of transportation. Bills of lading are frequently delayed in the bank handling, with the result
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that they do not arrive until after the relevant goods have been delivered. This
problem can occur not only when short-­sea transits are involved (e.g. in North
Sea trades). In documentary credit sales, documents are also often delayed in
the course of bank handling. From the ocean carrier’s point of view this creates
problems, since his duty to deliver the goods is based on the obligation of the
receiver to surrender the bills of lading. This is a legal implication due to the
nature and function of the bill of lading and this is also where the bill of lading
differs from the consignment note/­waybill. If the carrier delivers the cargo without the bill of lading being surrendered by the receiver of the cargo, the carrier
may be liable for any resulting loss or damage, if another person turns up with
an original bill of lading claiming delivery of the cargo. In such circumstances,
as previously mentioned, the carrier is not covered by his P&I Club with respect
to losses that may occur. What commonly happens in such a situation is that the
consignee may put up a bank guarantee to cover any loss or expense incurred by
the carrier as a result of his delivering the cargo without the bills of lading being
surrendered. Such guarantee is not unlawful per se, but the growing use of such
guarantees illustrates the deterioration of the bill of lading system. It has become
common that tanker charterparties, or dry cargo charterparties where large charterers are involved, provide that the shipowner has to release the cargo against
the charterer’s guarantee (not a bank’s guarantee) even without the surrender by
the consignee of the bill of lading at the port of discharge. Therefore, charterparties increasingly contain a clause saying something along the following lines:
“The owner shall deliver the cargo to the consignee without the presentation of
an original bill of lading against the charterer’s guarantee ”. There are various
ways of construing such clauses. Even if some of these clauses are hardly sufficient to deal with the problems that may occur, P&I Clubs have to a growing
extent accepted that such guarantees issued by well-known, reputable companies
of good financial standing will be acceptable.
For carriage over short distances there is usually less need for financing
by documentary credit. In some trades it has become usual practice to issue
destination bills of lading. In these cases, the bill of lading is either issued at the
destination in order to avoid loss of time, or else one bill of lading is carried on
board to be signed by the consignee as a receipt when the goods are delivered.
Legally, this is a questionable custom.
As already mentioned, a critical distinction is made between negotiable (or
rather quasi-­negotiable) and non-­negotiable bills of lading. Most bills of lading
used in ocean carriage are of the former type. The carrier is bound to deliver the
goods at the discharge port only to the legal holder of at least one original bill of
lading and by the same token only such holder is entitled to claim delivery of the
goods in exchange for surrendering the bill of lading. If two people, each with
an original bill of lading, claim delivery at the destination, then neither of them
is entitled to have the goods. The goods must then have to be stored until a court
decides who is the “true owner”.
Only a holder of all the original bills of lading may dispose of the goods at a
place which is not the destination. Thus, the carrier can only agree to re-­route
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the goods, when all the original bills of lading are produced to him. Similarly,
the carrier may only issue a new set of bills of lading in exchange for all the old
originals. However, it is not uncommon in practice for cargoes (especially oil)
to be delivered without bills of lading being surrendered, as well as for new bills
of lading to be issued without the old originals being produced. It is also important to keep in mind that, particularly in the oil trade, the goods may be sold
several times during the voyage and the destination may change several times.
It is inevitable that frequent conflicts between the legal rules and the practical
requirements arise.
All these features have led to a need for document simplification and replacement. One step has been the use of non-­negotiable sea waybills or similar documents used instead of traditional bills of lading (modelled upon the waybills in
use in other transport modes). This system works well where the shipper does not
demand the issuance of a traditional bill of lading. Another step was the use of
electronic devices rather than the paper documents.
The difficulty is to create a system which preserves all the functions of the
bill of lading without maintaining the disadvantages. Computerisation appears
to allow such a system, but there is still much suspicion in the trade among both
banks and traders regarding documentary replacement. The use of electronic
arrangements has increased. The impression is that trade has gradually adapted
to the situation, even though all the difficulties of adopting this have not yet been
overcome.
6.5.7 Electronic commerce
The transition from the traditional paper documents to the use of electronic documents is tied to other technical, social and financial developments, including, for
example, the improvement of navigational equipment, the growing use of containers which led to changes in transport patterns, the new financing methods, the
construction of huge containerships that are trading between a limited number of
high developed ports, and the new trade routes (such as the Northern Sea Route
passage north of Russia), etc. All these have brought about considerable changes
in the area of shipping and transportation, particularly in the liner business.
based distribution of transport data presupposes an
The traditional paper-­
efficient mailing service in order to forward the pieces of paper, as physical
objects, to the place of destination before the goods arrive. When this system
no longer meets the practical requirements, since cargo transports are often
quicker than the transfer of the documents, the transport industry must search
for and adopt new routines and processes. This is therefore what has happened in
practice. It is worth noting that, in 2008, United Nations Commission on
International Trade Law (UNCITRAL) established the “Rotterdam Rules” (see
section 6.5.1) which form a uniform and modern legal regime governing the
rights and obligations of shippers, carriers and consignees under a contract for
door-­to-­door carriage that includes an international sea leg, containing among
other things some provisions about electronic documents.
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Modern technology offers new infrastructure, based on the optimised combination of computerisation and telecommunication. In order to switch from
traditional paper-­based methods to electronic ones, the first step required was
to re-­define the term “document”. The word implies a “paper document” rather
than an “electronic document”. A document in a strict sense of the word refers
to the information contained in a paper document, in other words to the totality
of what has been written down as one entity. The paper itself is only the means
by which this information is distributed. Talking about paperless transfer (see
section 5.5.1) of transport information, does not mean that paper transport documents are eliminated from commercial procedures, but only that the traditional
means of transport information, a piece of paper, is replaced by a digital file on
a computer. Paper-­administrated operations are thus transformed into computer-­
based operations. The structured network intended to support the international
carriage of goods geographically is therefore serviced through sophisticated and
highly advanced telecommunication systems.
In an electronic network, there exists only one document in the strict sense
of the word, namely the “electronic document” stored in the memory disk of
a machine. All print-­outs produced are copies of the one and only electronic
document. A print-­out is a proof of what in fact was stored on the computer.
Print-­outs can be made at any time and for any number of copies, while their
contents might be altered as soon as the electronic document is amended.
Moreover, when paper documents are issued by the carrier, these will be
handed over to the shipper and other individuals (e.g. one copy kept for himself
as carrier’s copy, one copy sent to the master). After that, the carrier can no longer
influence the contents of the document. Where an electronic document has been
issued, typically only the carrier still holds access to the one and only document
during the whole transit of the goods. This fact makes it necessary for the shipper
to be provided with some sort of proof of what was stored on the computer at the
time the goods were delivered to the carrier. In other words, it shows how important it is to get the first print-­out. Obviously paperless methods are in practice
not 100% paperless. The first print-­out creates the necessary link between the
electronic recording and real life. The delivery by the shipper of the goods to be
carried against the first print-­out means that this is the first recording of what in
fact has been delivered. In this way the first print-­out constitutes a receipt and as
such it is prima facie evidence of the particulars of the goods. This means that the
legal concept of “document” should not be narrowed down to paper documents,
but must be appropriately adjusted and understood in a broader sense, meaning
both any data medium and a group or set of data recorded.
The BOLERO project,9 standing for “Bill of Lading Electronic Registry
Organisation”, was set up on a pilot basis by the European Union in 1999, so as
to suggest a practical solution, study the feasibility and promote the application
of electronic commerce and the respective documents. This did not prove to be
the final solution, even though it has been a step forward. According to Carr and
9 See www.bolero.net.
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Stone, BOLERO is a closed network available on a subscription basis, undertaking the role of a trusted third party and providing a platform of secure exchange
of electronic transport documents (e.g. bills of lading, documentary credits, guarantees). The subscribers – some of the most important corporations, financial
institutions, carriers, traders, shipping and logistics companies worldwide – are
subject to the BOLERO rulebook which provides the legally-­binding framework
for paperless transactions. The BOLERO title registry plays a vital role in respect
of bills of lading; it is a centrally operated database of information relating to
bills of lading. Transfer is made using a combination of notification, confirmation and authentication through digital signatures. The title registry records the
current holder of the electronic document ensuring its uniqueness. The registry
can only be updated by the current holder. Without the title registry record, the
document has no status and is just a copy of the data.
The bill of lading is a key instrument in global trade and is likely to remain
in the future. However, it is definitely a part of the digital revolution in trade
documentation. Similarly to its paper equivalent, the electronic bill of lading
(eBL) contains respective information (e.g. description of cargo, ports of loading
and discharge, date of shipment, terms and conditions of carriage etc.), it replicates the three basic functions of a paper bill of lading (receipt from the carrier
for the goods to be carried, contract for the carriage of the goods, document of
title entitling the rightful holder to claim delivery of the goods) and provides
the holder with the respective rights, obligations and limitations. The benefits
of switching to eBLs are numerous, immediate and concern improvements on
speed, ease of use, accuracy and cost of trade. Automation reduces overheads,
document transmission has no basic constraints, fast processing reduces the
likelihood of goods being discharged prior to the arrival of the bill of lading
thus cutting the need for letters of indemnity, trade settlements have been
accelerated, enterprises improve their working capital and credit line management, while transactions are more secure, reducing the risk of fraud, since eBLs
enjoy protection from digital signature and encryption technology similar to that
used in banking for the transfer of electronic funds. Finally, in a globalised market era, where increasing emphasis is placed on speed, eBLs are indispensable
tools for carriers, shippers, commodity companies and banks in their effort to
digitise their international trade operations and gain competitive edge.11
As the advantages of electronic bills of lading have become apparent and their
role have been increased, they have been recognised around the globe. It is worth
to be mentioned that BIMCO has issued a relevant standard charterparty clause.
Additionally, P&I clubs of the International Group typically provide a standard
coverage for eBLs on the same basis as for paper bills. Besides, as mentioned
already, the “Rotterdam Rules” contain provisions which deal with electronic
10
10 Carr, I., Stone, P. (2014) International Trade Law (Routledge, 5th edition, pp. 194–195).
11 Bolero International Electronic Bills of Lading are Part of the Quiet Revolution in World Trade
(www.bolero.net, accessed 21 November 2016).
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documents. Whether the solutions suggested will prove to be efficient remains
to be seen.
6.6 Carrier’s liability
The ocean carrier’s liability for damage to or loss of the goods is regulated in different ways depending mostly on the means of transportation and the particular
trade, since different rules may apply as long as international conventions use
somewhat differentiating approaches. In a charter relationship the owner and the
charterer are basically free to agree on and distribute between themselves the
liability for cargo damage. In liner service, where the bill of lading is the main
document governing the relationship between the cargo owner and the carrier,
mandatory legislation – based on the certain international conventions mentioned
above (see section 6.5.1) – has been introduced in many countries. The idea
behind these rules is to place a minimum liability on the ocean carriers for damage to cargo, primarily where the bill of lading is the governing document. Under
these regimes the carrier is vested with a compulsory liability in relation to the
shipper as well as to the consignee. On the other hand, where a charterparty governs the relationship between a carrier and a shipper who acts also as charterer
in the charterparty, then the mandatory rules do not take precedence over their
parties’ contractual intentions as between a shipowner and a charterer contracted
in the charterparty. However, a “bona fide” (i.e. acting in good faith) third party
holder of the bill of lading can invoke the mandatory rules which apply.
When making claims for cargo lost or damaged in a carriage by sea, various
questions may need to be asked in order to ascertain whether liability can be
established against one or more of the parties involved. The main questions are:
• What are the grounds of liability?
• Against whom can a claim be made?
• Will the shipowner or the charterer be held ultimately liable?
These questions will be discussed below, particularly the basis for the liability
of the carrier. With respect to the last question, it can be briefly mentioned here
that, even if the charterer and the owner have between themselves agreed on the
distribution of cargo liability, a cargo receiver may nevertheless, under the bill
of lading, have a claim against either of them. In such a situation there may be a
question of redress between the owner and the charterer.
6.6.1 Liability for cargo under charterparties
The questions concerning allocation of liability for cargo under voyage charterparties and time charterparties will be dealt with separately under respective
chapters (see chapters 11 and 12). It is known that a bill of lading is usually
issued for each lot of cargo and the liability for cargo under the bill of lading is
governed by national rules based on one of the international conventions which
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are not immediately applicable to charterparties. Therefore, as a base for the next
chapters, the following sections will attempt to explain the fundamental rules of
liability for cargo under a bill of lading, on which cargo receivers usually found
their claim.
6.6.2 Sea carrier’s liability statutory regime
An initial reference to the international cargo conventions has been made in section 6.5.1. Here, focus is given in the evolution of the sea carrier liability regimes
worldwide.
Even from the 19th century, the bill of lading regime used in different cargo
trades was amended with new liability clauses appearing against the shipowners.
The question of the ocean carrier’s liability was historically tied to the characteristics of the bill of lading as a document of title “representing” the goods, as well
as to the need of transferring the document and thereby the title to the cargo. In
English law, those questions were dealt with in the Bill of Lading Act 1855, which
was much later replaced by a new UK Carriage of Goods by Sea Act 1992 (UK
COGSA). The new Act deals with various transport documents, not only with the
traditional bill of lading.
In the USA, where cargo interests were traditionally strong, compulsory
legislation was introduced through the Harter Act of 1893. Under this statute, for
the first time a minimum liability was put on sea carriers loading or discharging
cargo in the USA. This legislation still forms a basis for the carrier’s liability in
the USA, despite being superseded in some parts by the US Carriage of Goods
by Sea Act 1936 (US GOGSA) which formally implemented the Hague Rules
1924. In fact, the Harter Act formed the forerunner for the Hague Rules. The US
COGSA 1936 still applies only from loading to discharge of a sea carriage concerning ports of the USA, whereas the Harter Act is still effective before loading
and after discharging of the goods (unless the bill of lading expressly makes
COGSA fully applicable to such shipments), as well as for coastal trades within
the United States. According to the Harter Act, the shipowner is prohibited to
insert any clause in a bill of lading that reduces or eliminates his responsibility
to exercise due diligence, properly man, equip and supply the ship and to make
the ship seaworthy. The shipowner’s negligence or exception clauses of bills of
lading are thus conditional, meaning that they do not relieve the shipowner (or
his servants such as the manager, the agent and the master) from liability for
loss or damage to the cargo, arising from “negligence, fault or failure in proper
loading, stowage, custody, care or proper delivery . . .” of goods in the charge of
the shipowner or their servants, unless they exercise due diligence to make the
ship seaworthy in all respects. The Act also exempts shipowners from liability for
errors in navigation and management of the ship.12
During the 1920s the time came for an international convention aimed at some
protection for the cargo owners and of the bill of lading as a negotiable document,
12 www.shipinspection.eu (accessed 10 January 2017).
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therefore the Hague Rules were formed. This fundamental convention was created in 1924 to set a minimum mandatory liability of carriers acting worldwide.
Under the Hague Rules the shipper bears the cost of lost or damaged goods if
he cannot prove that the vessel was unseaworthy. In other words, the carrier can
avoid liability for risks resulting from human error provided he exercises due
diligence and his vessel is seaworthy. The Hague Rules form the basis of modern
international shipping, having influenced the national legislation in almost all of
the world’s major trading nations.
This convention was slightly amended and updated by two protocols, the first
one in 1968 and the second in 1979, but neither improved the basic liability
provisions, which remained essentially unchanged. The amended convention
is usually referred to as the Hague-­Visby Rules which were incorporated into
English law by the Carriage of Goods by Sea Act 1971 (UK COGSA 1971).
Having been issued 44 years after the Hague Rules, the amended convention was
kept short and consisted of only ten articles, but it failed to cover important issues
such as multi-­modal transport (i.e. the convention covers sea carriage only), the
container revolution etc.
During the 1970s, after pressure from several developing countries, work began
within the United Nations (UNCITRAL) to develop a new convention aimed at
replacing the previous ones. In 1978, a new convention, the Hamburg Rules, was
signed, placing on the carrier a more far-­reaching liability than do the Hague/
Hague-­Visby Rules. The new rules were embraced by many developing countries,
but they were largely ignored by ship-­operating nations, thus not having received
wide acceptance. It must be said that the Hamburg Rules require the contracting
states to denounce the earlier conventions within five years after the entry into force
of the Hamburg Rules. The Nordic countries have denounced the Hague Rules.
In 2008, the Rotterdam Rules were adopted by UNCITRAL. Even though they
are detailed – having 96 articles and a wider scope, covering also multi-­modal/­
ancillary transport, expanding provisions on the transport documents and liability
of the shipper, increasing the limitation amounts, dealing with the question of
delay etc. – they are still a long way from obtaining worldwide recognition.
Both the Hamburg Rules and the Rotterdam Rules refuse carrier’s exemption
for negligent navigation and management. Also, whereas the Hague-­Visby Rules
require a ship to be seaworthy only “before and at the beginning” of the voyage, under the Rotterdam Rules the carrier will have to keep the ship seaworthy
throughout the voyage.
The Hague Rules and the Hague-­Visby Rules have been made national legislation in several countries.
Since these conventions are rather complicated, they have not been adopted
in the same way in all countries and they are interpreted differently, a detailed
discussion about the carrier’s liability for cargo under the bill of lading is beyond
the scope of this book. However, there will be an effort to outline the basic rules
and the differences among various conventions.
Different countries follow various methods to incorporate these international
conventions in their legal systems. In this respect, the legislation may look
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different between the countries, since there are national rules based on one or
another convention or maybe a mixture of them.
Finally, it is very common practice for a bill of lading or a charterparty to incorporate an international cargo convention by the use of a so-­called “Paramount
clause”. Typically, the main purpose of such a clause is to incorporate an international cargo liability regime, such as the Hague or Hague-­Visby Rules (or less
frequently the Hamburg Rules) into the document which is (or which evidences)
the contract of carriage of goods by sea. Where the Rules are incorporated so as
to generally apply to a contract of carriage (bill of lading or charterparty), their
application will not be limited only to cargo claims. As the word “paramount”
means “supreme” or “above all others”, the clause is related to some feature that
prevails over everything else. Therefore, the paramount clause may incorporate
any particular legislation. The clause implies that the whole contract of carriage
would be subject to the terms incorporated by the paramount clause. For example,
if the clause states that the carriage of goods is subject to the Hague-­Visby Rules,
these Rules then become part of the contract of carriage and establish express,
contractual obligations and rights of the parties. Without the incorporation of the
Hague Rules/Hague-­Visby Rules or Hamburg Rules, the parties to a contract of
carriage are free to allocate the obligations and rights between themselves.13
6.6.3 Compulsory nature of liability rules
As already mentioned, the different conventions are mandatory in their nature.
This is expressed in the Hague-­Visby Rules (art. III, par. 8) in the following way:
“Any clause, covenant, or agreement in the contract of carriage relieving the carrier
or the ship from liability for loss or damage to, or in connection with, goods arising
from negligence, fault, or failure in the duties and obligations provided in this article
or lessening such liability otherwise than as provided in this Convention shall be
null and void and of no effect ”.
The Hamburg Rules (part VI, art. 23, par. 1) use the following language:
“Any stipulation in a contract of carriage by sea, in a bill of lading, or in any other
document evidencing that contract of carriage by sea is null and void to the extent
that it derogates, directly or indirectly, from the provisions of this Convention. The
nullity of such a stipulation does not affect the validity of the other provisions of the
contract or document of which it forms a part. A clause assigning benefit of insurance of the goods in favour of the carrier, or any similar clause, is null and void ”.
The cargo liability conventions determine risk allocation schemes between the
carrier and the cargo owner. The relevant articles of these sets of rules concern
the basis for liability distribution, defining also the exemptions of liability, the
liability regime for damage to, or loss of, goods or for delay, the extension of
liability in time and in transport stages (e.g. from which point to which point a set
13 www.shipinspection.eu (accessed 10 January 2017).
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of rules applies), etc. Thus, in general, more risk is placed on the carrier under the
Hamburg Rules than under the Hague Rules. The risk allocation scheme under
the Hague/Hague-­Visby Rules exempted the carrier from liability under certain
circumstances and limited his liability substantially. These Rules imposed on the
carrier a general duty of care in relation to the goods throughout the applicable
period of carriage and provided that the cargo should not be exposed to a high
degree of risk, for example when carrying deck cargo or live animals (i.e. the two
main exceptions in Hague-­Visby rules’ application). The Hague/Hague-­Visby
Rules apply mandatorily only from the loading of the goods onto the ship until
their discharge from the ship.
Nothing in the conventions prevents the carrier from accepting a more extensive liability than the minimum prescribed, but this should be made in agreement.
This frequently happens in container and ro/­ro trades. Furthermore, as already
mentioned, the Hague/Hague-­Visby Rules’ liability is commonly introduced
through a Paramount clause into bills of lading covering shipments where the
Rules would not otherwise apply. Paramount clauses are also commonly inserted
into charterparties, where the Hague/Hague-­
Visby Rules are otherwise not
applicable.
6.6.4 Scope of application of the international cargo conventions
The international cargo conventions may apply automatically or by agreement.
The rules are automatically applicable mainly when the agreement for carriage
is included in a bill of lading and when there is a carriage from a country which
has signed the bill of lading convention. In some cases the rules are automatically applicable when the carriage is destined to a country which has signed the
convention. There are also other supplementary rules which may complicate the
picture. Particular legal problems may come to the fore in the future if the different conventions all remain in force but operate to various extents in different
countries.
It should be noted that, in cases where the basic agreement is set out in a charterparty containing provisions as to cargo liability less severe to the carrier than
those found in the compulsory regulations, the latter will nevertheless apply in
the relationship between the carrier and a third-­party consignee acting in good
faith. This means that the parties under the charterparty may have contracted for
less cargo liability than the compulsory conventions call for. However, as soon as
a bill of lading covering the shipment has reached a holder who has not accepted,
or has not been able to take note of and accept the charterparty liability, the compulsory liability becomes applicable.
The period of liability in the Hague/Hague-­Visby Rules is based on the so-­
called “tackle-­to-­tackle” principle, that is, from the moment when the cargo is
hooked onto the vessel’s gear upon loading until it is again hooked off upon
discharge. However, this tackle-­to-­tackle principle is not applied in the same
manner to all countries. In some cases an extension of the scope of application of
the Rules may occur towards a principle providing that, even if the goods have
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in fact been discharged, the carrier still may have a duty to ensure that the goods
are not unloaded and stored in such a manner that damage is likely to occur after
the discharge. There is also a general duty on the master to protect the cargo
owner’s interest and he may have an obligation to intervene if he becomes aware
(or more precisely he ought to have become aware) that the goods are not being
properly taken care of immediately after discharge. Thus, for example, a reefer
carrier cannot be sure of relying on the tackle-­to-­tackle principle if refrigerated
cargo is discharged onto a pier where there are no refrigeration facilities. Numerous factors may be relevant in determining the carrier’s extent of obligations in
such a case, depending for example on who the actual receiver is; how the port
and warehouse system in the harbour functions; what influence the carrier has on
the situation, etc. In some countries additional compulsory legislation has been
introduced covering the terminal period.
The Hamburg Rules have also adopted the more extensive application, so that
they apply from the time the carrier “has taken over the goods from the shipper. . .
until the time he has delivered the goods. . .”. Transport documents involving
container or ro/­ro trades etc. commonly use this more extensive liability period.
It is also used when there is no mandatory legislation to such effect. Finally, the
same applies also to the Rotterdam Rules.
6.6.5 Liability system
Damage to the goods may arise in different ways. There may be a physical damage
or goods may be short-­landed or may be delayed or they may never arrive at the
port of destination. Another type of damage is related to wrong statements being
made in the bill of lading. Under any international cargo convention, the liability
system is primarily geared at physical damage and short-­landing, but damage due
to delay is also often covered in some way. Moreover, if wrong statements have
been made intentionally in the bill of lading, then there may be a criminal case.
The liability system under the Hague/Hague-­Visby Rules will be used as a
basis of the next discussion, since this is still the most applied cargo liability
regime in international carriage of goods by sea. This liability system is based
upon several different factors.
First of all, the carrier has a duty to make the vessel seaworthy. This is
expressed in the Hague-­Visby Rules (art. III, par. 1) in the following way:
“The carrier shall be bound before and at the beginning of the voyage to exercise
due diligence to:
(a) Make the ship seaworthy;
(b) Properly man, equip and supply the ship;
(c) Make the holds, refrigerating and cool chambers, and all other parts of the
ship in which goods are carried, fit and safe for their reception, carriage and
preservation”.
It must be emphasised that there is no absolute liability on the carrier to make
the vessel seaworthy, but he shall “exercise due diligence”. If he can later prove
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that he has acted properly in this respect, he is relieved from liability for loss of
or damage to goods as a result of the vessel’s unseaworthiness.
In a next provision (art. III, par. 2) it is also stated that the carrier’s obligation
is to “properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried ”.
The principal rule in the Hague-­Visby Rules liability system is expressed in the
following way (art. IV, par. 2q):
“Neither the carrier nor the ship shall be responsible for loss or damage arising or
resulting from:
(q) Any other cause arising without the actual fault or privity of the carrier, or
without the fault or neglect of the agents or servants of the carrier, but the burden
of proof shall be on the person claiming the benefit of this exception to show that
neither the actual fault or privity of the carrier nor the fault or neglect of the agents
or servants of the carrier contributed to the loss or damage ”.
This rule is fundamental to the liability provisions. The principle is that the carrier is responsible for loss or damage arising or resulting from the fault or privity
of him or his servants or agents. The burden of proof is on the carrier, which
means that he has to prove that he, his servants or agents, have not caused the loss
or damage by negligence.
There are a number of specific exceptions which relieve the carrier of responsibility for loss or damage resulting from (art. IV, par. 2(c)–(p)):
“...
(c) Perils, dangers and accidents of the sea or other navigable waters.
(d) Act of God.
(e) Act of war.
(f ) Act of public enemies.
(g) Arrest or restraint of princes, rulers or people, or seizure under legal process.
(h) Quarantine restrictions.
(i) Act or omission of the shipper or owner of the goods, his agent or representative.
( j) Strikes or lockouts or stoppage or restraint of labour from whatever cause,
whether partial or general.
(k) Riots and civil commotions.
(l) Saving or attempting to save life or property at sea.
(m) Wastage in bulk or weight or any other loss or damage arising from inherent
defect, quality or vice of the goods.
(n) Insufficiency of packing.
(o) Insufficiency or inadequacy of marks.
(p) Latent defects not discoverable by due diligence ”.
The above exemptions actually illustrate situations where the carrier is not
negligent, but there are also two “true” exceptions of the carrier from the principal rule. These are “error in navigation” and “fire”. As per the Hague-­Visby Rules
(art. IV, par. 2(a)–(b)):
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“Neither the carrier nor the ship shall be responsible for loss or damage arising or
resulting from:
(a) Act, neglect, or default of the master, mariner, pilot, or the servants of the carrier in the navigation or in the management of the ship.
(b) Fire, unless caused by the actual fault or privity of the carrier ”.
As regards (a) above, it should be noted that only negligence etc. in the
navigation or the management of the ship relieves the carrier of liability. It is
sometimes difficult to draw the distinction between “management of the ship”
(error in navigation) and “management and handling of the cargo” (commercial
error).
A contractual principle is that a party may not one-­sidedly change his fundamental contractual obligations (fundamental breach). In the law of carriage of
goods by sea the carrier may thus not “deviate” from the agreed or normal route.
The doctrine of deviation may sometimes cause problems when it comes to striking a balance between what is commercially suitable but legally not permitted.
If the cargo is lost or damaged further to ship’s deviation (causing also a delay
as a consequence), the carrier is not liable provided the deviation was made “in
saving or attempting to save life or property at sea” or else provided the deviation was “reasonable” (Hague-­Visby Rules, art. IV, par. 4). If the deviation is
not regarded as reasonable considering both the carrier’s and the cargo owner’s
interests, the carrier will risk facing liability without keeping any of the defences
or limitations of an applicable cargo convention. Most charterparties and bills of
lading contain “scope of voyage” (or similar) clauses, which allow the carrier to
change the ship’s route. This may be a commercial cost-­saving right for the carrier not least in liner operation. However, in bill of lading relations such a “scope
of voyage” clause may, depending on the circumstances, be in conflict with the
mandatory rules on deviation. Thus, clear and non-­contradictory wording should
always be used.
There are also some other important exceptions. The Hague-­Visby Rules (art. I,
par. c) do not apply to the carriage of “live animals and cargo which by the
contract of carriage is stated as being carried on deck and is so carried”. Furthermore, it should be mentioned that in modern container traffic a number of
containers are always placed on what may be described as “deck cargo”. To
avoid the above-­mentioned problems, the carrier may agree in the bill of lading
to take on the same liability for cargo on deck as under-­deck.
Summing ­up, the Hague-­Visby Rules did not essentially change the fundamental solutions proposed by the Hague Rules, but rather introduced a change in
the limitation rules, increased liability amounts and established rules specifically
oriented to solve problems arising from the use of containers.
6.6.6 Cargo claims and time limits
A cargo owner who intends to claim against the carrier for loss of or damage to
the goods should do this in writing and enclose the necessary documents and
supporting evidence, such as a copy of the bill of lading, survey or tally reports
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from discharging, invoices stating the value of the cargo, etc. It is important for
the claimant to be aware of the one-­year time limit which, in the Hague-­Visby
Rules (art. III, par. 6), has the following wording:
“. . . the carrier and the ship shall in any event be discharged from all liability whatsoever in respect of the goods, unless suit is brought within one year of their delivery
or of the date when they should have been delivered. This period, may however, be
extended if the parties so agree after the cause of action has arisen”.
It is not sufficient to make sure that the claim has been sent to the carrier before
the year has ended. Unless the claimant gets payment, he must either get time
extension from the carrier or file a suit before the year has ended as otherwise his
claim will be time-­barred.
In the Hague-­Visby Rules (art. III, par. 6 bis), but not in the Hague Rules, there
is a special section dealing with the redress situation by which the claimant gets
additional time when the claim is an action for indemnity against a third person.
The Hamburg Rules extend the initial limitation period to two years, as do the
Rotterdam Rules.
6.6.7 Limitation of carrier’s liability
All international cargo conventions specifying carrier’s liability also contain
rules limiting the carrier’s liability. These rules, which limit the carrier’s liability
to a certain amount per package or per unit or per kilo, are fairly complicated. It
may be difficult to define “package or unit” and it has also been difficult to find an
international monetary base for the limitation. As a result of these complications,
the final outcome of the claimant’s action may vary depending on the particular
law that is applicable. In the case River Gurara [1998] 1 Lloyd’s Rep. 225, the
question discussed was whether, under the Hague Rules, the container would be
regarded as the unit for the limitation or instead whether the various packages
within the container should be regarded as the units for limitation. In this case the
Court of Appeal adopted the latter view, which is close to the solution adopted in
the Hague-­Visby Rules (art. IV, par. 5(c)).
The Hague-­
Visby Rules have supplemented the Hague Rules in certain
respects. As per art. III, par. 5(a), the limitation figure was increased and the
claimant may use either the package/­unit limitation or a limitation per kilo of the
weight of the goods, whichever is preferable to him (i.e. higher). Furthermore,
even though the limitation amounts were previously based on common denominators used in the international regulation of liability, such as Poincaré francs
(a fictitious monetary standard), Hague Visby Rules (art. III, par. 5(d)) adopted
Special Drawing Rights – SDRs (a “basket” of different major currencies) as the
measuring unit for the limitation of liability.
The Hamburg Rules in their turn increased further the limitation amounts,
while the Rotterdam Rules have followed suit.
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6.6.8 Carrier’s liability for inspection and description of the goods
The importance to shippers of getting a clean bill of lading has already been
mentioned (see section 6.5.3.3). According to the cargo conventions, the master
or the carrier’s agents shall, at the request of the shipper, issue a bill of lading
after the goods have been received. The bill of lading should contain a statement
concerning leading marks for identification of the goods, quantity, as well as
apparent order and condition of the goods. According to the Hague-­Visby Rules
the carrier is not entitled to bring in counter-­evidence to the particulars entered
into the bill of lading, against the third person who has acquired the bill of lading
in good faith. Thus, it is important for the carrier that the master and the ship’s
officers make proper examination and description of the goods. The goods will
be inspected and tallied before loading, but exactly how inspection and tallying
are arranged is dependent on the type of cargo, method of loading etc., decided
from case to case. The usual wording in the bill of lading is that the cargo “has
been received in apparent good order and condition”. This indicates that the carrier is not strictly liable for the cargo and thus, for instance, not liable for hidden
defects.
The sequence of events is that, while the bulk cargoes are loaded in the traditional way, the ship officers carry out the supervision and make a note in the
mate’s receipt of any particulars related to the cargo, such as defects in the packing. All such remarks in the mate’s receipts should then be inserted into the bill
of lading. This is where the practical problem arises. The shippers are not happy
to have an “unclean bill of lading”, but if shippers are properly advised, they may
have the chance to take back defective cargo and deliver substitute cargo free
from defects.
If the carrier fails to insert a remark or to make an annotation in the bill of
lading, and the cargo receiver encounters a damage, the carrier will in such cases
have a liability as if goods were short-­shipped or damaged but, as mentioned,
there may be cases where a more far-­reaching liability may be imposed on him
for wrongful statements. The use of so-­called “back letters”, such as letters of
indemnity, has already been mentioned (see section 6.5.3.3).
The procedure looks very different when loading containers and trailers, but,
as it is less relevant to chartering matters, no extensive reference will be made
to that.
6.6.9 Date of bill of lading
The bill of lading is a receipt for the goods that have been received for shipment
or loaded on board. In either case the correct method of dating the bill of lading
is to insert the date when the last parcel of the particular cargo lot was received
(in the former case) or when the last parcel of the lot was taken on board (in the
latter case). This means that every lot must be regarded separately.
Sometimes, in bulk shipping the shippers wish to have the bills of lading
dated differently for various reasons. For example, there may be customs duties
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introduced on a certain date, and in order to avoid the consequences of such new
tariffs the shipper may request the ante-­dating of the bill of lading. The master
and/­or the carrier should not accept such a procedure as this may constitute fraud
and, if discovered, may cause serious difficulties with receivers, bankers, authorities etc. The carrier’s liability for incorrect dating of bills of lading is usually not
covered by P&I insurance. However, in liner business post-dating does not seem to
be uncommon, due to the volume of cargo handled, the diversity of shippers and the
speed of operations. This may just mean that all bills of lading are dated and signed
some time after all the goods have been received or loaded.
Ιt is quite common to find in time charterparties (and for that matter also in
voyage charterparties) a clause explicitly stating that the owner shall “sign bills
of lading as presented” and also that the shipowner undertakes to deliver cargo
even if bills of lading are not presented, provided however, that a guarantee is
given by a charterer’s parent or by a bank covering the risk of the carrier for possible damages to be paid for having delivered cargo to somebody not entitled to
receive it. However, it needs to be stressed that “as presented” does not mean that
the carrier shall have a duty to sign a bill of lading that is incorrect. Regarding the
delivery of cargo without a bill of lading being presented, it is worth noting that a
guarantee is not worth more than the guarantor’s financial standing and integrity.
6.6.10 Basic features of Hamburg Rules
The Hamburg Rules of 1978 were intended to supersede the Hague/Hague-­Visby
Rules. Even though the Hamburg Rules have had limited practical application,
their principles were adopted by the next convention; the Rotterdam Rules of 2008.
Comparing to the Hague/Hague-­Visby Rules, except for the change in layout,
the Hamburg Rules presented some major material changes, as follows:
• they apply to all contracts for carriage of goods by sea between two
States, except when the contract is a charterparty;
• the “error in navigation” exception has been abolished and the “fire”
exception narrowed;
• the performing and contractual carrier will be jointly and severally liable against the cargo owners;
• the bill of lading will be conclusive evidence of the contract of carriage
against the carrier if the bill of lading has been transferred to a third
party who acts in good faith; and
• the limitation amounts have been increased.
The Hamburg Rules won little acceptance and did not eventually manage to
replace the older rules on an international scale. Whether the latest convention
(Rotterdam Rules) will finally come into force as a binding statutory regime of
international sea transport is an open question, since only a few countries have
proceeded to its ratification. This convention has, among other changes, reintroduced the catalogue of liability exceptions.
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6.7 Insurance matters
Shipping and transportation involves substantial risks on the part of the carrier
(shipowner) as well as the cargo owner. The various risks involved have since
long been covered by different insurances. From the shipowner’s point of view,
there is a risk of damage to or loss of the vessel, which has to be covered. This
is done through the so-­called “hull and machinery” insurance. Furthermore, the
shipowner may risk loss of income in case the ship, due to damage, is lying idle
while being repaired. Such risk may be covered through a particular “loss of
income” insurance. But the shipowner in the capacity of carrier also has a risk
for damage occurring to cargo, people on board the vessel, passengers, persons
ashore such as stevedores etc. Thus, the shipowner normally has the “protection &
indemnity” (P&I) insurance which covers the shipowner’s liability for damage
of, loss of or delay of cargo in case he is liable. The shipowner may also be liable
for oil pollution caused by the vessel. This major risk will also be covered by the
P&I insurance and to some extent through the hull insurance. On the other hand,
the cargo owner faces a risk of loss of or damage to the goods or delay of their
delivery, therefore he will generally carry a cargo insurance policy covering these
particular risks. There are a number of risks involved in the sea transport of goods
and the different parties may cover them by various insurances. The cargo owner
will typically have his risks covered by cargo insurance at the same time as the
carrier will cover his liability risk through the P&I insurance.
6.7.1 Liability against third parties
Occasionally, there are claims from a third party other than cargo claims. For
instance, claims from stevedores injured during loading or discharging, from
passengers, claims for pollution of the sea, or claims as a result of collision with
other vessels, tugs, pilot boats, piers etc.
In most cases the owner is primarily liable against a third party for such damages. But, sometimes the primary liability also rests on the charterers. As an
example, time charterers in some countries have been held liable for damages
caused by oil spillage and for accidents in which passengers were injured. When
the primary liability rests with the owner, he may sometimes have a chance to
claim recovery from charterers. This is especially so in time chartering when stevedores, tugs, pilots, etc. are employed by the time charterers. On the other hand,
when primary liability rests on the charterer, he can also have the opportunity to
seek recovery from the owner.
Owners’ liabilities against cargo owners, passengers and stevedores are covered by P&I insurance, which typically covers all owners’ liabilities against third
parties. An important and ever-­growing issue regarding third party liability of
shipowners concerns oil pollution. Liability rules in this respect have become
more and more extensive. In this field, the USA has played a predominant role
by establishing the Oil Pollution Act of 1990 (OPA ’90). In view of the very high
claim amounts at stake, such liability rules strain significantly the P&I Clubs.
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As regards oil pollution, TOVALOP and CRISTAL should also be mentioned.
TOVALOP (Tanker Owners Voluntary Liability for Oil Pollution) is a private
tanker owners’ organisation guaranteeing cover for pollution liability exceeding
what is covered by the P&I Clubs. TOVALOP clauses are found especially in
tanker time charterparties and the intention in that context is to guarantee that any
liability should be on the owners and not on the time-­charterers, as well as that
owners have the extra cover given by TOVALOP. CRISTAL (Contract Regarding
an Interim Supplement to Tanker Liability for Oil Pollution) is a cargo owners’
plan which is supplementary to TOVALOP, providing compensation in connection with cargoes carried in vessels covered by the TOVALOP scheme.
Although claims from third parties can be considerable, their thorough examination goes beyond the scope of this book. Owners typically seek valuable advice
and guidance from their P&I clubs and hull underwriters when such cases arise.
6.7.2 Cargo insurance and P&I cover
From the above it is evident that there is a risk and liability distribution between
the seller and the buyer under the sales contract often following an Incoterms®
clause. A traditional CIF purchase puts on the seller a duty to insure the goods
only on minimum cover. Should the buyer wish to have extra insurance protection, this should be agreed as quickly and explicitly as possible with the seller, or
the buyer should make his own extra insurance arrangements. Therefore, actual
cargo insurance may be on different terms and conditions and against different risks than those provided by the Incoterms® rules. For example, “all risks”
may be agreed to get covered or large manufacturing or trading companies may
carry their own insurances on an annual basis. As it has been seen, in relation
to the cargo interest the carrier has a certain minimum liability, depending on
the applicable regime of each case, there is thus another risk distribution. The
ocean carrier normally covers this liability by being a member of a protection
and indemnity (P&I) Club. These Clubs cover the members’ liability for cargo
damage, personal injury, oil pollution and certain other risks. The rules of the
P&I Clubs are more or less standardised. This means that, if a buyer of the cargo
under a sales/­purchase agreement encounters a loss related to the goods purchased, he would normally turn to the cargo insurer for compensation. The cargo
insurer would then turn to the carrier for compensation in accordance with the
liability rules applicable, and the carrier would subsequently be reimbursed by
his P&I Club. However, it must be emphasised that under P&I insurance the
­carrier is not reimbursed for damage occurring due to a clean bill of lading
­having been issued, which should have been marked, or due to cargo having been
wrongfully delivered without the surrender of an original bill of lading.
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CHAPTER 7
Charter forms
This is the “backbone” of this book, forming the transition towards the core
subjects of shipbroking and chartering practice. The charter types influence
considerably the revenue side, the cost structure, the risks undertaken, thus the
profitability of a shipping company. Understanding the mechanisms behind the
vessels’ charter types is a key aspect in the commercial management of ships and
for ship management in general. This chapter aims to present the most important types of charter and explain how they function. Emphasis is placed on the
most popular types of vessels’ charter, namely the voyage charter, the time charter, the bareboat charter and the contract of affreightment. The text deals with
the following: first, fundamental differences between bulk and liner shipping are
examined as far as chartering matters are concerned; second, basic chartering principles and charter types are generally discussed forming the basis for a
detailed analysis of chartering practice in the following chapters. Obligations,
duties, liabilities and rights of the involved parties are briefly discussed per type
of charter; third, standard forms of charterparties per type of charter are introduced; and finally, cost and risk allocation per type of charter is examined.
7.1 General remarks about chartering
A shipowner may enter into a vessel charter with a cargo owner or an entity in
need of tonnage in its business. The shipowner and the charterer are the contracting parties (see section 9.3) in the relevant charter document, namely the
charterparty. The parties generally agree to use a certain standard type of charter
form and then add or delete clauses to reflect the circumstances of each individual fixture. The charter form selected depends on several factors, such as the
purpose of the vessel’s use, the vessel’s type and particulars, the trading options
and limitations, the cargoes to be carried and the parties involved. Some of these
factors have been discussed above, while others will be examined further below.
A vessel’s charter means that the owner (or the disponent owner1) of a vessel
in one way or another promises to put a vessel at the disposal of the charterer for
a particular voyage or for a certain period. The charterer, in his turn, promises
to pay the agreed freight or hire. The management of a ship involves a number
of costs. There are fixed capital costs (e.g. for debt amortisation and servicing),
fixed operating costs for the daily management of the vessel (including manning,
1 Disponent owner is a person or company which has commercial control over a vessel’s operation without owning the ship (e.g. the “charterer” in a bareboat charter who becomes “owner” in a
subsequent time or voyage charter is a disponent owner for the second charter).
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repairs, maintenance, insurance etc.) and variable voyage costs depending on
the vessel’s employment (e.g. bunkers, port expenses etc.). Shipping business
is also connected with different risks, which are not the same when the ship is
in port or at sea. In a charterparty, the costs and risks are divided between the
contracting parties, namely the shipowner and the charterer, in various ways
(see section 7.6). Judgment of the market expectations and allocation of the risks
involved with regard to various factors influence the choice of the type of charter
and the level of the freight or hire rate.
Apart from the individuals who own ocean tonnage, nowadays many shipowners engaged in ocean transportation are companies or partnerships of various
kinds, sometimes large multi-­national companies. It has also become increasingly common for shipowners to co-­operate in many ways. As an example, they
may have entered into an agreement to have a common technical management
of their vessels. This may not be an extensive form of co-­operation, but there are
also several other examples of much more important and wide common services
provided, such as joint ventures or pool agreements etc. (see also sections 4.1
and 7.2). Another important modern feature is the segregation among ownership,
management, operation and trading of vessels, which all are different functions
related with the shipping business. One may choose to describe ocean shipping
from several angles, but, as far as chartering and shipbroking practice is concerned, the most important distinction is between liner service and chartering
vessels in the open market, since these reflect basically different business ideas
and types of vessel employment (see also section 1.1.3).
Over a long period, the structure of shipowning has changed considerably. Traditionally, a shipowner (shipping company) was involved in most or all the functions related to shipping business. They were shipowners arranging for financing,
selection and employment of personnel (officers and crew), insurance, bunkers,
maintenance (repairs, spares etc.), as well as for finding employment for the ship
(chartering). Now, these functions are often split up between various entities,
not seldom having their places of business in different countries (see chapter 4).
7.2 Liner and bulk shipping from chartering perspective
In liner shipping the shipowner (carrier, operator) runs a regular service between
more or less fixed ports and usually on a fixed time schedule. The liner operator
acts as a common carrier, accepting all general cargo shipped between the ports
covered by his service. Due to high operating and administrative costs, liner companies have formed few and strong alliances to offer their services worldwide. It
should always be remembered that all forms of co-­operation in the ocean transportation are subject to strict anti-­trust laws, not only from the USA but also from
the EU competition authorities. Those involved in international carriage of cargo
by sea should be aware of the EU competition law framework, particularly when
it comes to pool and co-­operation arrangements. A shipper who wants to book
cargo space on board a vessel (typically a containership) contacts the agent of a
particular line, who then often confirms the sea transport by a so-­called “booking
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note” (B/N ). When the goods have been received for shipment or shipped on
board, a bill of lading will be issued on behalf of the carrier.
In bulk/­tramp shipping, the vessel is plying between different ports depending
on where it finds suitable cargoes. This is at least how traditional bulk/­tramp
shipping is often described. The basic idea still holds true, but the situation within
this sector is rather varied. The basic document here is the charterparty (C/P) and
all terms and conditions are negotiated individually, often based on a previous
charter. As in liner shipping, bills of lading are issued upon receipt or upon shipment of the goods. Thus, there may be a conflict between the terms of the bill of
lading and the charterparty provisions.
A feature of the liner operator’s business philosophy is that he will try to
remain in his particular trade network and develop his tonnage, so as to serve
clients and sustain profitability. Sale and purchase of vessels is therefore rather
a consequence of a new investment or a disinvestment decision with respect
to the liner service provided. In bulk shipping, by contrast, the sale and purchase of ships plays a much more central role. An owner calculates and decides
whether to ride on a favourable high freight level wave or instead sell a vessel
at peak price. The second-­hand market and the freight market are normally
closely related.
Liner pricing schemes used lead to a low volatility of freight rates, comparing
to those of the bulk markets (see sections 2.1 and 2.2). On the other hand, in chartering business of the open market the freight is negotiated on an individual basis,
but the general freight market level plays a decisive role and sets a framework
(see sections 2.1 and 2.3). Whereas in bulk shipping changes in freight levels are
often both very fast and violent, changes are slower in liner business. Liner operators are normally hit at a later stage during a recession than the bulk operators.
Correspondingly, the effects of a boom will reach the liner operator later than the
bulk operator.
There are no watertight walls between the liner and the bulk sector. However,
in the modern era of shipping, the ever-increasing degree of vessels’ specialisation has restricted the exchange of tonnage between the sectors. Thereby, the
freight levels in the open market are generally not affected by fluctuations of
rates in the liner market, and vice versa.
7.3 Types of charter
Chartering or similar sea transport engagements, including booking transportation of cargoes with liner ships (even that is not considered a chartering business
form in the strict sense), can be based on different methods and principles, as
follows:
• Chartering vessels in the open market on a charterparty basis versus
liner services provided on a booking note basis
A crucial distinction is that made between liner business and bulk/­tramp ship operations as explained in section 7.2. In liner shipping the liner operator generally acts
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as a common carrier, accepting all general cargo shipped between the ports covered
by his service. Terms and conditions of the cargo transport (mostly containers) are
agreed on the “booking note”, while the contract of carriage is usually the “bill
of lading”. On the contrary, in non-­regular, bulk/­tramp shipping, the shipowners
continuously seek the best employment for their vessel considering its type, present position, state and expected development of the freight market etc. Terms and
conditions of vessel employment are depicted on a “charterparty”.
• Fixed sum versus payment for time spent
In liner business owners’ remuneration is normally fixed, but often including cost
variation clauses (see further section 11.2). Charter agreements may be divided into
two wide groups. On the one hand, project-­based agreements, where the owners are
paid a fixed sum for doing a specified job, and on the other hand time-­based agreements, where the owners are paid on the basis of the time spent by the charterers
for the use of the vessel or part of it. Fixed sum is also called lumpsum. A lumpsum
agreement can be either a total fixed sum like “USD 350,000” or a calculated fixed
sum like “USD 40 per vessel’s cubic metre cargo space available”. Project-­based/­
fixed sum types of charter, such as voyage charters and liner services, will be dealt
with in chapter 11, the time-­based types of charter, such as time charters and bareboat charters, will be handled in chapters 12 and 13, while contracts of affreightment as the most important of the hybrid charter forms which cannot easily be sorted
under any of the above-mentioned types of charter will be discussed in chapter 13.
• Use of the ship from a capacity point of view
An important basis for distinguishing different types of charter agreements is the
use of the ship from a capacity point of view. The charterer may have chartered
the whole vessel, that is, all the space of it. Then, the charterparty spells out that
the charterer shall deliver “a full and complete cargo” to be loaded within the
limits of the ship’s capacity. If the owner cannot find a charterer for the whole
vessel, he may divide the vessel’s cargo space between several charterers who
may each use, for example, certain portions of the vessel or certain cargo holds.
This is known as space or slot charter. Space charter is not the same thing as
when several charterers together charter the vessel. In the latter case, the individual charterers will not have separate rights of control, but will have to act jointly
or by authority. In the open market, the most common charter types are those
concerning the chartering of the whole vessel. On the other hand, in liner business,
the owner (carrier) normally promises to carry a specified cargo (e.g. 10 boxes of
machinery, 100 bags of coffee etc.), among many other cargoes carried at the same
time, typically in containers. This is known as the carriage of general cargo.
• Use of the ship from a functional point of view
From a functional point of view, the most important distinction of charter types is
made among a voyage charter, a time charter, a bareboat charter and some hybrid
forms.
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The charterer and the owner often agree that the ship will carry a certain cargo
from point A to point B (or will make several consecutive voyages between specific points). The freight to be paid is calculated for the voyage or the voyages
to be performed. This charter is known as voyage charter, while consecutive
voyages charter forms rather a variation of a voyage charter.
Another charter type is the contract of affreightment (CoA), where a shipowner
may agree with a charterer to carry for him a large quantity of goods, on specific
voyages between certain ports and within a specified period (e.g. one year). One
problem with the term “contract of affreightment” is that it is sometimes used to
describe a freight contract in general, rather than the above-mentioned specific
charter type. Depending on the circumstances, synonym concepts of quantity
contract or transport contract or volume contract may be used also to describe
a CoA. In order to perform his obligations under a contract of affreightment,
the shipowner may employ several of his vessels on an almost continuous basis
which in its regularity is similar to liner trading. By using efficiently the contracts
of affreightment, the shipowner may fill up his tonnage capacity and make a
profit on additional, marginal or return cargoes. Contracts of affreightment may
imply an efficiently operated, advanced transportation system with a regular flow
of cargo to be served.
There may be particular circumstances where a large business enterprise may be
both a cargo owner and a shipowner/­ship operator, this is the so-­called “industrial
carriage” case. For example, this appears in the oil sector where the large oil
companies may own their own tonnage, but acting in parallel as important charterers of vessels in the open market.
The owner often puts the ship at the disposal of the charterer for a certain
period of time, during which the charterer, within the limits of the agreement,
controls the commercial employment (not the operation) of the vessel. In such
cases, the price paid to the owner is not called “freight”, but “hire”, determined
per time unit (for example per day) and paid regularly in advance. This type of
charter is known as time charter.
Bareboat charter (or demise charter) is another form of a period charter, where
the vessel is put at the disposal of the charterer for a certain period of time, but
here the charterer takes over the possession and full control of the vessel (i.e. the
entire responsibility for the operational and commercial function of the ship). All
the costs and expenses except the capital costs are borne by the charterer. The
capital costs are the only remaining to the shipowner.
Sometimes, the picture is often much more complex, since mixed charter
forms have evolved and a charter agreement may sometimes have features of a
joint venture, where the co-­operation and profit/­loss sharing idea comes more to
the fore than it does in traditional charter forms. Today, it is not uncommon for
a second-­hand purchase or a newbuilding contract of a vessel to be connected
with a joint venture scheme or a charter contract. It often occurs a sale and purchase agreement to be related with a “charter-­back” arrangement (e.g. a sale and
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time or bareboat charter back agreement). Furthermore, a bareboat charter or a
second-­hand purchase may often be combined with a specific ship management
agreement.
The different forms of charter will be more closely described below, although
still in general terms (for a more detailed description, see chapters 11–13).
7.3.1 Voyage charter
Under this type of charter a vessel is employed for a single voyage. The person who charters the ship is known as a voyage charterer, the payment is called
freight and the contract a voyage charterparty. This form of charter is typical
within bulk/­tramp trading (open charter market). The “charterer” may be the person owning the cargo or may charter the vessel for someone else’s account. The
“shipowner” of a voyage charterparty, from whom the actual voyage charterer
charters the ship, may himself be a time charterer or even a voyage charterer
who sub-­charters (sub-­lets) the ship. In case the shipowner of the charterparty is
not the registered owner of the ship, he is normally described as “time chartered
owner” or “disponent owner”. Thus, there may be a chain of charterparties which
must all be regarded as separate and distinct from one another.
From a practical point of view, a voyage charter means that the owner promises to carry on board a specific ship a particular cargo from one port to another.
The vessel shall arrive at the first loading port and be ready to receive the cargo
on a certain day or within a certain period of time.
Under a voyage charter the owner retains the operational control and the commercial management of the vessel, being responsible for all the (variable) voyage
expenses, such as bunkers, port charges, canal dues, extra insurances, etc., further
to the (fixed) daily running costs of the vessel. The charterer’s costs are usually
expenses and charges relating to the cargo. Loading and discharging costs are
divided between the owner and the charterer in accordance with the agreement
from case to case. For example, in FIO (free in and out) terms, the charterer bears
the costs involved in connection with loading and discharging of cargo. When the
charterer controls the cargo-handling operations, he also has the responsibility
for the efficiency of the loading and discharging, as well as for the time the vessel spends at ports. Often, but not always, he may have a liability with respect to
damage occurring to the goods during loading and discharge.
The relationship between the parties is determined in the voyage charterparty.
The names of the parties and the ship are stated, as well as the size of the vessel, the cargo to be carried, places of loading and discharge etc. There will be a
clause on the freight to be paid (amount to be paid, time of payment and method
of payment) as well as on laytime and demurrage (see chapters 11 and 15). The
costs and risks are distributed between the parties. Since the owner bears the
operational and commercial costs, the terms dealing with costs and expenses will
only mention explicitly a limited number of items, such as expenses with regard
to the cargo, perhaps costs for loading and discharging, sometimes certain extra
insurance costs, etc. and not least the costs due to liability for damage to the cargo
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and damage to the vessel. The charterparty may also regulate the allocation of
costs and risks for unforeseen events.
The discharging port need not be nominated in the voyage charterparty, and if
such is the case, the charterer must have the right later to direct the ship within a
certain range to a specific port of discharge. A basic feature of the charter is that
the nominated vessel shall be put at the disposal of the charterer. However, it is
not uncommon for the actual ship not to be nominated at the time when the charter is concluded, but that only the type of ship is described, with the actual ship to
be nominated later. Furthermore, the owner often reserves the right to substitute
a vessel or sometimes there is even a duty to substitute a vessel.
The ship must be in the geographical position which the owner specified when
the charter was concluded. The vessel must, without undue delay, be directed to
the port of loading. A cancelling day is often determined for the latest allowed
arrival of the ship at the port of loading and, if she has not arrived at that time,
the charterer may cancel the charter. The charterer may also be entitled to claim
damages when the arrival of the vessel at loading port is delayed, if the delay
is due to owner’s negligence. However, the forthcoming voyage will often take
place at a later stage. Finally, the owner has then a duty to carry out the agreed
voyage or voyages without unnecessary delay and without deviating from the
agreed or customary route.
A divergence from the voyage route is called deviation. In case deviation is not
allowed (by agreement, by custom or by law), the laws of most countries put on
the owner a far-­reaching liability for damage to the goods. In the port of loading
the vessel must proceed to the berth assigned by the charterer provided that this
berth is safe. If the master does not receive any order to proceed to a certain
berth, he has to make the choice himself and, if possible, select and proceed to a
customary and safe berth.
In the port of loading the charterer must procure the agreed cargo. Unless
otherwise agreed, the cargo must not be of a dangerous nature. In voyage charter
the type of cargo is specified and, in the majority of cases, once such a cargo has
been accepted for carriage by the owner, he cannot at a later stage claim that it
is dangerous. However, there may be situations where circumstances will turn
the cargo into dangerous goods. Problems related to dangerous cargoes are more
common in liner services and time chartering.
The cargo must be brought alongside the ship at the loading port by the charterer and must be collected from the ship’s side at the port of discharge by the
charterer or the recipient (consignee) who will be the legal holder of the bill of
lading. Particularly with bulk cargoes, the charterer often undertakes to pay for
loading and discharge. In this respect, one often meets in the voyage charterparty an FIO ( free in and out) clause, or similar, such as FIOS (free in, out and
stowed) or FIOST (free in, out, stowed and trimmed). The FIO clause puts on the
charterer an obligation to pay for loading and discharging operations. The basis
is also that the charterer will be liable for damages to the cargo occurring during
loading and discharging. Since the master has a duty to supervise the orderly
loading and discharge (particularly from a vessel’s seaworthiness point of view),
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the owner under an FIO clause may also, in certain circumstances, be liable for
damage to the cargo. On the contrary, the phrase liner terms is used to mean that
the owner shall bear the same cargo-handling costs, as he would in liner service.
The concept of “liner terms” is not very precise and cannot be recommended
for use in the bulk trades, except in individual cases when the parties know the
exact consequences of such cost and risk distribution. Moreover, specific reference should also be made to a concept of the same meaning that may be seen
in bulk shipping, the gross terms, which formed an alternative to FIO option of
cargo-handling cost allocation in the Gencon ’76 (part II, clause 5(a) “loading/­
discharging costs – gross terms”), providing that loading, stowage and discharging was to be carried out by the owners, with charterers being responsible for
bringing and receiving the cargo alongside. Under Gencon ’94, the gross terms
alternative has been removed, reflecting the practice that fixtures on the Gencon
form are normally on FIO terms or similar2 (see appendix 1, Gencon ’94, part
II, clause 5(a) “loading/­discharging – costs/­risks”, and see further section 11.6).
Where the charterer carries out the loading and/­or discharging, the parties generally agree that he will have a certain period of time at his disposal for the loading and discharge of the vessel, the so-­called laytime. The laytime is a reflection
of the basic idea of voyage charter, that the owner, who is operating the ship,
will be liable for all delay in relation to the transit, whereas the charterer may be
liable (or partly liable) for delay in loading and discharge. If the charterer fails to
load and/­or discharge the vessel within the laytime specified, he has to pay compensation for the surplus time used, the so-­called demurrage. To a certain extent,
the charterer may also be liable for loss of time if there is no berth available for
the vessel in the port of loading and also for certain other losses of time that may
occur as a consequence of the charterer’s acts or omissions. On the other hand,
if the charterer saves time for the ship by carrying out his undertakings more
quickly than agreed, he may be entitled to claim compensation, the so-­called
despatch or dispatch money, but generally only if an agreement has been reached
to this effect.
A charterer of a whole vessel usually has a duty to deliver a full cargo within
the ship’s capacity. For that purpose a clause of the type “a full and complete
cargo” of the agreed goods to be delivered and loaded is used, and correspondingly, the owner has a duty to receive the goods and carry them.
Unless a lumpsum freight is paid, a form of freight compensation, the so-­called
deadfreight, may be claimed by the owner if too little cargo is delivered or the
cargo is delivered in such a state that the ship’s full capacity cannot be utilised.
This compensation is based on the difference between the full freight to which
the owner would have been entitled if all cargo were delivered and the freight
to be paid according to the intaken quantity, less any expenses saved for short-­
delivered cargo. On the other hand, if the vessel cannot load the agreed quantity –
she may have been described wrongly or may have taken on board too large a
2 Cooke, J., Young, T., Ashcroft, M., Taylor, A., Kimball, J., Martowski, D., Lambert, L.R. and
Sturley, M. (2014) Voyage Charters (4th edition, Informa Law from Routledge, p. 776).
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quantity of bunkers – a corresponding freight reduction will be made. Difficult
questions of evidence may arise under such circumstances.
The charterer has a duty to deliver cargo and to perform his undertakings and
may not, unless there is an express agreement to the contrary, allege that it is
difficult to find cargo or to have it made available to the vessel. However, some
charterparties contain exemption clauses to this effect. These clauses are normally understood to mean that the charterer is only exempted from his duty to
procure cargo if the hindrance has had an effect on the loading or discharging
work, but in some charterparties the exemption clauses are more far-­reaching.
The freight is normally paid on delivery of cargo unless something else has
been agreed. However, prepayment clauses are common, but freight will be settled and paid only for the cargo discharged after the voyage. If the ship is lost or
does not reach its destination, the Anglo-­American principle is that no freight
will be paid at all. In some legal systems the owner may be entitled to a proportionate freight in such circumstances, if the cargo has been moved toward its
destination. In order to protect the owner’s right to freight, the freight prepaid
clause is often amended with the following wording: “freight shall be considered as fully earned upon shipment and non-­returnable in any event whether or
not the voyage shall be performed and whether or not the vessel and/­or cargo
shall be lost or not lost ”.
Unless the freight is earned and has actually been paid upon loading, the
owner may need some security for the due freight payment. When the goods have
been loaded on board, the owner has thus physically taken into charge property
belonging to the charterer (if the charterer is the owner of the goods). At least, in
this case, the general principle seems to be that the owner has a right for lien on
the goods. If he has such a lien there may also be justification for the charterer to
remain responsible for payment, since the owner may, at the destination, refuse to
discharge and deliver the cargo unless the receiver pays what is owed (see further
section 11.9 about lien and cesser).
The voyage charter is further analysed in chapter 11.
7.3.2 Time charter
Under a time charter the crew is employed by the owner, who is also responsible for the nautical operation and maintenance of the vessel and the supervision
of the cargo – at least from a vessel’s seaworthiness point of view. Within the
framework of the contract, the charterer decides the voyages to be made and
the cargoes to be carried. It is often said that the charterer is responsible for the
commercial employment of the ship, whereas the owner remains responsible for
the nautical operation. This distribution of functions puts the master of the vessel
in a kind of a demanding position between the owner – his employer and main
principal – and the time charterer, having to take both into consideration.
The time charterer may be a shipowner who for a time needs to enlarge his
fleet, or a cargo owner (seller or buyer of goods) with a continuous need of transport, who does not want to invest money in a ship but wants to have the control
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of the commercial employment of the vessel. Sometimes a shipbroker or an agent
is engaged in time chartering a vessel in order to speculate on the freight market.
The time charter determines a time and place for the delivery of the vessel
from the owner to the charterer and redelivery from the charterer to the owner.
Depending on the place of delivery/­redelivery, the length of the charter period,
the scope and the particulars of the charter, one may distinguish some variations
of the time charter; namely a trip time charter, a round voyage time charter and
a period time charter. A trip time charter will take the vessel from one place
to another exactly as under a voyage charter, but here charterer is paying hire
per day, instead of freight per ton of cargo carried. When there is a time charter
on a round-­trip basis the delivery and redelivery of the ship will take place in
approximately the same geographical area. In a period time charter the place
of delivery and redelivery of the ship will often be agreed separately, but often
within a certain range of ports. Apparently, the two hybrid time charters (trip
time and round voyage) are different from the traditional period time charter.
When the ship is engaged for a period, she will be employed within an agreed
geographical area or on a worldwide basis but typically within internationally
acceptable trading/­navigating limits. Delivery/­redelivery will be normally agreed
to take place somewhere within an agreed geographical area, e.g. “US East Coast,
Jacksonville–Boston range”. The time charter period may last from a number of
days to a number of years. As will be discussed further, it is not an easy task to
set out precisely when the vessel shall be redelivered, and therefore, the parties
may have to use different contractual methods to solve this particular problem.
The types of cargo allowed for carriage will normally be agreed specifically in
the time charterparty.
It is not uncommon that the parties agree on an option, that is, the charterer
and/­or the owner will be entitled to demand a prolongation (extension) of the
charter for a certain time on the same or revised terms and conditions or on terms
and conditions to be mutually agreed. The charterparty then spells out when the
owner/­charterer shall inform his counter-­party that he wishes to use his option
(option declaration). This is particularly the situation in cases of time charters
over at least one year, and the charterparty may then stipulate for example: “charter period 2 years, 2 months more or less in charterer’s option, such option to be
declared on. . .”. A slight hire adjustment may be agreed for the optional period.
The hire is payable in advance for 15 days or a month or other agreed period. If
the hire is not paid promptly, the owner may be entitled to cancel the charter. This
right to cancel, which may also be exercised due to a minor delay in payment,
stems from the inadequate legal security the owner enjoys should the hire not be
paid. Certain limits may be inserted in the time charterparty to prevent the owner
from exercising his right of cancellation, at least when caused by technicalities
(see anti-­technicality clauses and section 12.6.3).
The chartered vessel has to be in conformity with the charterparty with respect
to the cargo carrying capacity, speed, bunker consumption and other agreed terms
and conditions. The cargo-carrying capacity is particularly important to the charterer. If he is planning to transport heavy goods (deadweight cargo), the vessel’s
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deadweight or the weight the vessel can load, namely deadweight cargo capacity or
dwcc is important to him. If he is planning to transport light and bulky goods
(cubic cargo), the volume of the ship is more important. Special demands are
often made on specialised vessels as to particular gear and equipment needed.
For example, with respect to oil tankers the capacity of the pumps is important.
Similarly, reefer vessels must meet certain requirements in respect to refrigerating capacity. Typically, the shipowner has by contract a duty to keep the vessel
seaworthy during the charter period. In Anglo-­American law the owner has a
strict liability for the vessel’s seaworthiness and fitness for service at the time of
the delivery of the vessel to the time charterer, a liability from which the owner
may exempt himself by agreement, at least to a certain extent. On the other hand,
it is quite common that the charterparty defines that the vessel is “to be maintained throughout the currency of the charter”.
As under a voyage charterparty, the ship must be delivered to the time charterer
not later than a certain date. Any delay beyond the cancelling date entitles the
charterer to cancel the charter. The voyages under a time charter also have to be
carried out without delay. If the vessel is delayed due to a breakdown of machinery or for other specified reasons, she may be off-­hire, and then a reduction of
the time may be made so that no hire will be paid during the off-­hire period. But
under a time charter, the owner cannot be basically blamed for delay not caused by
the ship. Time lost as a result of adverse weather is thus the responsibility of the
charterer. This is also in accordance with the basic risk distribution between the
charterer and owner in a time charter. Modern tanker time charterparties may state
that the owner is entitled to full hire based on an agreed speed from pilot station to
pilot station, thus the owner then carries more of the time risk than he would have
according to the time risk distribution under more traditional time charterparties.
Under a time charter the owner’s principal duties are thus aimed at faultless
manning, as well as technical and operational ship management. In that respect,
the charterparty puts on him a basic responsibility for the correct performance of
the voyages.
The liability for the cargo may be determined in different ways and may rest
with the shipowner or with the charterer or may be divided between them in one
way or another. The charterer often has a right to give certain instructions about
the signing of bills of lading, whether these are signed by the master or by the
agent or the shipowner or the charterer.
When giving employment orders to the vessel, the charterer must keep within
the trading limits prescribed by the contract, with respect to geographical areas
as well as cargoes to be carried (trading limits and cargo exclusions). Unless the
parties have reached an agreement to the contrary, the charterer may only order
the vessel to safe ports and berths. The charterer must follow the terms and conditions of the charterparty as to excepted cargoes and, as in a voyage charter, he
must not ordinarily have goods carried which may cause damage to the ship, the
personnel or other cargo.
The charterer is liable for costs directly connected with the commercial use
of the vessel, for example bunker costs, port charges, as well as expenses for
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the loading and discharge of cargo. Furthermore, the charterer may be liable for
damage (normal wear and tear excepted) caused to the ship in connection with
her use. If the charterer fails to employ the ship, he must still pay hire since he is
principally liable for the commercial use of the vessel.
At the end of the charter period the charterer has to redeliver the vessel to the
owner at the place or area agreed. It would often be hard for the charterer to use
the ship effectively during the last part of the charter period if he had to redeliver
her on a particular day. Therefore, the charterparty usually contains provisions
on overlap, entitling the charterer to use the vessel for a reasonable time after
the expiration of the charter against an agreed hire, or on underlap, entitling the
charterer to redeliver her somewhat earlier than the basic charter provides.
The time charter is further analysed in chapter 12.
7.3.3 Bareboat charter
A bareboat or demise charter is a quite different form. This contract resembles
a lease of the ship from the owner to the charterer. The bareboat charter usually
means that the vessel is put at the disposal of the charterer without any crew. The
charterer will thus take over almost all of the owner’s operational and managerial
functions, except for the payment of capital costs. This means that the charterer
will have the commercial as well as the operational responsibility for the vessel,
paying for crewing, maintenance and repair, insurance etc.
The bareboat charter had been traditionally a rather unusual type of charter, but
with changing trading and investment patterns it has become more common in
the last decades. Sometimes, a second-­hand sale has been disguised as a bareboat
charter with an option to buy in order that taxation can be avoided. Bareboat
charter usually covers a certain period of time, typically a long one. Furthermore,
the charter is often hinged to a ship management agreement. As mentioned, the
bareboat charter may be connected with a purchase option, either at expiration of
the charter or during the charter period.
Bareboat chartering may often be described as a kind of ship financing rather
than as a genuine charter agreement, one of the reasons being that the owner
has surplus capital to invest, whereas the charterer, lacking such capital, needs
the vessel commercially. Such a type of a bareboat charter is a form of “financial leasing”, a modern type of financing based on a three-­party relation, where
the current owner of the vessel is the seller of the ship and the “shipowner”
of the bareboat charter, the financier is a mortgagee (bank) which consents to
the bareboat/­sale transaction, while the “charterer” of the bareboat charter is the
buyer of the ship who initially pays the bareboat hire for a certain period and then
becomes the actual owner by exercising the “option to buy” and paying an agreed
amount at the end of the bareboat charter.
Various factors, such as maritime policies applied, may lead to a growing use
of bareboat in spite of several different problems that may arise with respect to
the nationality of the ship, manning rules etc.
The bareboat charter is further analysed in chapter 13.
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7.3.4 Consecutive voyage charter
Consecutive voyage charters are special variations of voyage charters in which
the vessel is contracted for several voyages which follow consecutively upon one
another. Sometimes, the charterparty states that the ship will make a certain number of consecutive voyages and sometimes that she will make as many voyages as
she may perform during a certain period of time. In the latter case, the parties have
agreed, as in time charter or a CoA, that the vessel will be at the disposal of the charterer for a certain period of time. Therefore, as a consecutive voyage charter contains
both voyage and time charter elements, it is considered a hybrid charter form.
In a typical consecutive voyage charter a named ship is chartered usually on
one charterparty, to proceed loaded from loading port to discharging port, to
return in ballast and repeat the voyage consecutively until all the agreed cargo
has been transported. The individual voyages are made on voyage charter terms
and conditions, with the freight typically being paid per voyage in USD per ton
of cargo carried, a laytime calculation in ports of loading and discharge respectively, etc. This means that the risk and cost distribution of a charterer in a consecutive voyage charter is very different from that of a time or a CoA charterer
(see section 7.6). Basically, the problems arising under agreements for consecutive voyages are those of voyage charters, but the time factor causes certain
structural differences, both related to costs and income aspects. Consecutive voyage charterparties often contain provisions protecting the owners’ interests, such
as bunker clauses, escalation clauses, currency clauses or certain other clauses
related to long-­term cost variations (see section 13.2.2.3).
This charter type is common where large volumes of cargo are concerned,
but while this method lacks the flexibility of the CoA (where not a named ship
but any ship of agreed specifications may execute the voyages), the freight rates
may be possibly higher here to take into account the ballast, non-­earning, return
voyage from discharge port to load port. The consecutive voyages may be for a
specific number of round-­voyages, usually of a rather short distance. Long term
such charters may also be found, then having similarities with time charters, but
without keeping some of the disadvantages to the charterers of a time charter.
For example, in a time charter the charterer is obliged to pay hire for a period of
time even though the open market rates have declined in the meanwhile.3 On the
contrary, in a consecutive voyage charter the charterer may have a greater flexibility, as he may have agreed to pay freight per voyage in accordance with the
prevailing open market rates of each voyage.
In this hybrid charter type, the owner and the charterer should exercise great
caution when it comes to determine rates of freight and demurrage, since charter
rates which diverge from the prevailing market rates may induce the charterer to
abuse the charterparty. For example, if the freight rate is high and the demurrage
rate low, the charterer may be tempted to keep the ship lying idle on demurrage
instead of making a new voyage.
3 www.shipinspection.eu (accessed 1 May 2017).
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7.3.5 Contract of affreightment
A contract of affreightment (CoA) is also a hybrid charter borrowing characteristics from a voyage and a time charter. It is often called quantity contract or
volume contract, because under a CoA the owner promises to satisfy the charterer’s need for transport capacity over a certain period of time, often one year or
even several years. It is not unusual that quantity contracts are made up within
the framework of liner operations. Under a quantity contract the individual vessel
has less importance for the charterer, but the important aspect is that the owner
shall perform his duty to carry with an agreed type of tonnage, namely a vessel
of agreed specifications which may very well be a chartered vessel from another
owner or operator. A similar contract form is the so-­called requirement contract
or service contract. Under such agreements, the quantity of cargo to be carried
is not guaranteed by the charterers or the shippers and the owners will place tonnage as and when required according to a notice and nomination system.
Shipping companies without owned ships may undertake as operators to carry
out such transportation services, therefore they charter-­in tonnage to fulfil the
individual voyages. The voyages of a CoA may then be carried out with tonnage
of the owner’s choice but within the framework of the contract. The terms and
conditions under this contract will not affect the shipowning position of the head
owner, since he is only bound by the transport agreement with his charterer.
The contract of affreightment is further analysed in chapter 13.
7.3.6 Space (slot) charter
This is not a form of vessel charter in the typical sense. In liner shipping it is
common for a shipper or a forwarding agent to hire a specified part of a vessel’s
capacity or get the first option to use a certain part of a vessel’s capacity. With
such agreements as a base, a liner operator can provide a liner service without
employing any of its owned or time-­chartered vessels.
In 1993 BIMCO first issued a standard document with the code name Slothire,
based on the idea that the charterer hires a specified number of “slots” from
the owner. A “slot” was defined as “the space on board the vessel necessary to
accommodate one TEU”. The document was evidently intended for the container
vessels.
This type of charter, also known as “space charter”, was in use before Slothire
was issued. The idea is that the owner lets to the charterer a certain part of the
vessel (e.g. one specified deck) or a certain part of the vessel’s capacity (e.g.
specified in slots, area, volume, weight, metres of rail etc.).
The remuneration to the owner can be based on capacity booked or capacity
used and it can be calculated per voyage or per time unit as the parties agree.
In Slothire the remuneration is based on “hire per voyage” for capacity booked
irrespective of the capacity actually used.
An important question is whether the owner or the charterer shall be liable as the
carrier against the cargo owners. The answer to this depends on the construction
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of the charter contract. The normal routine is that the charterer, in his capacity as
“disponent owner”, books the cargo carriage in his own name and thus acts as
“contracting carrier” (see chapter 6). Moreover, the bills of lading are normally
issued by the charterer in his own name and by using his own forms. The bill of
lading forms vary in respect with the “identity of carrier clause” and each case must
therefore be assessed on an individual basis as to whether the charterer or the owner
or both are liable against the cargo owner. As regards the relation between the charterer and the owner, the solution in Slothire is that owners are liable in accordance
with the Hague-­Visby Rules, but there is no other liability-­sharing clause.
Since the owner has very limited information about the cargo, it is essential that the contract specifies what kind of cargo is acceptable to the owner. In
Slothire the owner has the right to be informed about the cargo and, if necessary,
open the containers.
Charterers in some cases handle loading and discharging in the same way as
in time chartering but, as several charterers are often involved, it is also common
for the cargo to be delivered to a terminal and for the owners (liner operators) to
handle the loading and discharging.
Space charter is used not only in liner trades, but also as a supplement to the
regular transport needs of the industrial carriers, for example the big forest companies. If an industrial company has vessels on time charter but not sufficient
cargo to fill the chartered vessel, they can agree with a forwarding agent that he
space charters the vessel’s free capacity and acts as disponent owner or similar
against the cargo owners.
7.4 Chartering documents
The most important documents governing the commercial and legal relationships
between the parties are charterparties and bills of lading, but other documents
such as booking notes, delivery orders and mate’s receipts also play an important role (see section 6.5.3). On top of these, there are documents such as cargo
manifests, invoices, customs declarations etc., which are required by various
authorities. In some cases numerous copies of the original documents are issued
further to the originals. For example, the bill of lading is normally issued in three
originals and several copies. An export transaction normally embraces extensive
paperwork, although efforts have been made to simplify the documentation and
the document routines, for example by the use of computers.
As a matter of principle oral agreements are generally binding, but particularly
in international charter transactions, due to the necessity of evidence the parties
make out a written document, namely the charterparty.
Figure 7.1 shows the place of the principal documents in the chartering and
shipping process, while briefly discussing how the different documents are
inter-­related.
Under charterparty (C/P) terms the master will sign the bill of lading (B/L)
when he has ascertained that all cargo has been loaded on board (and the owners
have collected the freight if freight prepaid has been agreed).
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Figure 7.1 Documents in the Chartering – Freighting – Loading Process
In liner trades, where the booking note (B/N) is the basic sea transport agreement, the bill of lading will be signed by the master or the liner agent as per the
standing authority. Verification of information related to the cargo is based on
the corresponding mates’ receipts (M/R) which may contain remarks about cargo
condition or quantity at the time of loading.
The cargo manifest is a cargo list compiled and issued by the loading agents
for use by the owners’ various departments and externally by authorities, agents
and port services. Some copies of the manifests may be for internal use solely
by the owners. It is a shipping document that summarises all bills of lading that
have been issued by the carrier or its representative for a particular shipment. For
example, a cargo manifest may show the shipment’s consigner and consignee,
as well as listing product details such as number, value, origin and destination.
It must be noted that the mutual agreement for sea transport between the
charterers or shippers (paying freight) on one side and the owners or the line
(receiving freight) on the other side is the charterparty (in bulk shipping) or the
booking note (in liner shipping). The bill of lading is the document representing
the cargo, with the purpose to verify the owner of the goods, to be a receipt for
cargo received for loading onboard (or that the cargo has been shipped), as well
as to be evidence that there exists an agreement for sea transport (C/P or B/N).
7.4.1 Approved and private chartering document forms
Charterparties and bills of lading are almost always made out on standard forms.
BIMCO (see section 3.2.2) plays an important role in the drafting of standard
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forms of shipping documents (particularly charterparties and bills of lading)
and has produced a large number of so-­called approved documents. Among
these, a distinction is made between agreed, adopted and recommended forms.
Figure 7.2 below presents a classic explanation of BIMCO-approved documents.
Figure 7.2 BIMCO “Approved Documents”
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Both shipowners and cargo interests (charterers) are well represented in BIMCO;
thus their documents are considered to be fair, balanced, up ­to ­date and accepted
from all shipping practitioners.
On the other hand, large shipping or industrial companies or major shippers
often design their own charterparties (private forms), which they normally use as
a basis for chartering negotiations and their cargo transportation. This is the exact
case in tanker chartering, where oil majors issue and follow their own charter
forms (see also section 7.4.2).
7.4.2 Charterparties
Legal problems may arise if additional terms and conditions are inserted into the
standard charterparty forms, since this may require deletions and adjustments in
the printed text, as well as further additions. It should be mentioned that the parties very seldom use a charterparty form without making any amendments. Even
the private types are often based on a standard form which has been amended by
individual clauses.
The purpose of standard charterparties is to standardise a number of clauses
frequently used by different parties in different trades, helping the parties eliminate their workload, since it will only be necessary to fill in certain items, such
as the names of the involved companies and details about the vessels, ports, cargoes, laytime and demurrage, notice time, freight or hire etc. Amendments and
modifications in a standard charterparty necessitate careful adjustments in the
printed text. This is often forgotten and in such case the charterparty may become
ambiguous and the object of a dispute. Furthermore, there are some agreed charterparties (e.g. the Scancon) which are intended to be used as is, without any
changes or amendments. These particular charterparties seem to have restricted
application.
Brokers often have a routine to draft a charterparty; among two parties a
specific pattern may have evolved to treat certain items in a particular way.
Where two parties have already concluded a charter on certain terms and conditions in the past, it may often be hard to convince the counter-­party (or
in practice his broker) that a clause should be drafted differently in a new
deal between the parties. However, depending on past legal cases, changed
customs and practices etc., the parties often have to adjust an old charterparty form. New commercial techniques, legislation, practices and circumstances may be a good ground for the parties to make considerable “riders”
and amendments to the standard form. The market situation and the negotiating skills of respective parties or groups of interests may lead to different
solutions, which gradually result in the update of the standard forms and the
publication of new versions.
In the chartering negotiations there may be certain difficulties in establishing
the borderline between “main terms” and “details” of the charterparty. Thus, the
end product of the charter negotiations, namely the final charterparty, does not
234
Charter forms
reflect only the commercial realities of each case, but also the level of knowledge
and the availability of time among brokers, charterers and owners.
The contents and layout of voyage charterparties differ from those of time
charterparties, where the former cover charters related to one voyage, while the
latter are related to charters about the commercial use of a ship over a period of
time. The voyage charter standard forms are numerous, since in voyage charter
the trades and the goods show such considerable variations and may require separate solutions. Within time charter the variation is much less and the number of
standard forms used is comparatively small.
The charterparty forms usually have code names which are often connected
with the intended use of the form. This is a typical situation in respect to BIMCO
contracts. For instance, Polcoalvoy is a voyage charterparty (VOY) intended for
coal trades (COAL) and drafted in co-­operation with Polish shipping interests
(POL). Among the several voyage charterparty forms produced by BIMCO,
some names may be mentioned such as Baltcon, Sovcoalvoy, Scancon and Nuvoy.
Among the BIMCO forms, the Gencon charterparty (see appendix 1 for Gencon
’94) merits particular mention since it is intended to be used when there is no
suitable special voyage charter form available. The Gencon charterparty contains
comparatively few standard clauses, since it should be possible to use it as the
basis for all trades. The Gencon form seems to have gained gradually more use,
but normally it requires several amendments and riders with respect to the individual business. The standard forms are often gradually revised and amended by
the issuing organisations, thus it is important that the negotiating parties clearly
agree on the particular edition to be used.
With respect to the tanker voyage charterparties, the forms are dominated by
the large oil companies, which have all drafted their own types, all of which being
regularly revised. For example, Shell issues and updates a voyage charter form
called Shellvoy (see Shellvoy 6 in appendix 2), while BP issues the respective
BPvoy. These forms are fairly similar and more or less of a “take-­it-­or-­leave-­it”
type. Intertanko, the international association of independent tanker owners (see
section 3.2.4), has adopted the Tankervoy ’87, a charter form used occasionally.
This document has been influenced by the charterparty forms introduced by the
oil companies. Additionally, Asbatankvoy is a tanker charter form corresponding
to the previous Exxonvoy, but also with limited application.
BIMCO has also published some important standard time charterparties;
Baltime, Linertime and Gentime. This latter form has been designed as a form
that should be adaptable to various individual requirements. The first form is
basically an old charterparty form which was revised in 2001 to meet modern
requirements, whereas Linertime was lately updated in 2015 to reflect current
time charter practices where liner operation is involved. The Gentime is a later
form first published in 1999. Further to that, the most widely used standard time
charterparty for the dry cargo sector remains the New York Produce Exchange
(NYPE ). It was first drafted by American broker interests in 1913. Its latest revision of 2015 is the sixth one, reflecting current developments. NYPE 2015 (see
235
C harter forms
appendix 6), though published by ASBA (Association of Shipbrokers and Agents,
USA), it was jointly authored by ASBA, BIMCO and SMF (Singapore Maritime
Foundation). NYPE 2015 is a modernisation and substantial enlargement compared with previous major versions: NYPE ’46, Asbatime 1981 and NYPE ’93.
NYPE 2015 contains 57 clauses and one appendix. Despite the numerous
updates, it must be mentioned that the NYPE ’46 edition is still very commonly
used in the market. In addition, during the 1970s, the International Shipbrokers
Federation introduced the Fonasbatime, a time charter form not frequently
used. In general, Baltime is traditionally regarded as the time charterparty most
favourable to the owner, while NYPE is considered to be more favourable to the
charterer. However, NYPE ’93 seems to be regarded as a reasonably balanced
document acceptable to both owners’ and charterers’ interests. It is obviously too
early, however, to say whether the new NYPE 2015 will manage to replace NYPE
’93 or even NYPE ’46, as in shipping, old, officially replaced standard forms
have a tendency to survive many years after the official replacement by the new
version. For the tanker time charterparties, the oil companies have drafted their
own forms, such as BP-time, Mobil-­time, Shelltime (see Shelltime 4 in appendix
5) etc., having them regularly revised. Intertanko has drafted Intertanktime in the
past; however the document found limited practical use. For the more specialised
vessel types, particular private forms may be used in practice (e.g. in reefers).
Concerning bareboat charterparties, the prevailing standard form is published
by BIMCO and is called Barecon (see appendix 8, Barecon 2001). Regarding
contracts of affreightment, there are a few standard forms used for this type of
maritime business, the most popular being the Gencoa (a modern, general purpose contract for dry bulk cargoes, published by BIMCO in 2004, see a sample
in appendix 9), the Volcoa (an older document for dry bulk cargoes, published by
BIMCO in 1982) and the Intercoa (an older form for the carriage of oil products,
drafted by Intertanko but not well established in the market).
It needs to be re-­emphasised that there may not be much left of the printed
text when it comes to an individual charter transaction. There are frequent deletions and amendments in the printed text, while on top of that, a large number of
clauses may be added. It goes without saying that the result is often not a very
well-thought and structured legal document, where all the pieces have been carefully put together.
A comprehensive list of the most known standard forms of charterparties may
be found in appendix 10.
7.4.3 Transport documents
The transport documents (mainly bills of lading and sea waybills) and their relations to the charter documents and sales agreements were analytically dealt with
in chapter 6.
Before proceeding to the following section, a summary of the most important
chartering modes mentioned above, together with respective notes and remarks
on principal procedures and documentation, may be found in Figure 7.3.
236
Charter forms
Figure 7.3 Charter Types and Documents
237
C harter forms
7.5 Management agreements
Instead of operating ships with owned or chartered vessels, a shipping company
may try to sell or buy “know-­how” and services by particular ship management
agreements. This is a type of agreement that has become much more common
with the increasing functional split-­up of the shipowner’s duties. It is reminded
that chapter 4 has dealt with ship management aspects and their relation to chartering business. Moreover, the most widely used standard ship management
agreement form is that published by BIMCO and called Shipman (see appendix
15 for Shipman 2009).
The management agreement is not a chartering agreement in its traditional,
absolute sense, but rather a shipping know-­how and service agreement, arising
from an outsourcing ship management model, where the manager in one way or
another puts his particular knowledge at the disposal of the principal (shipowner).
The owner will thus entrust to another person (the manager) one or several of his
functions. A ship management agreement may be either more restrictive covering only some services (e.g. manning, insurances, accounting etc.), or it may
be more comprehensive covering several functions (e.g. crewing and technical
management) or even the whole management of the vessel including the commercial management (chartering). Therefore, though not a chartering agreement
in itself, a management agreement may considerably influence the commercial
employment of a vessel.
When commercial management is undertaken by a ship manager, the latter
concludes agreements with respect to the vessel in the name of the owner and for
the owner’s account. The owner in turn covers the manager for all his expenses
and also pays to him a compensation, which may be determined in various ways,
typically having the form of a management fee per vessel per day or per month.
The idea behind this type of agreement is that the principal shall bear the commercial risk, even though the manager shall decide about the vessel’s commercial operation and employment. Obviously, there must be a basis of confidence
between the parties.
The ship management agreement has come to play a role of ever-growing
practical importance for several reasons. In periods of shipping recession some
owners go bankrupt and the receivers in bankruptcy or banks, normally without
knowledge of shipping, entrust the commercial activity to a manager for a period
of time. Similarly, several shipyards act in the same way, when buyers under
shipbuilding contracts are unable or refuse to take delivery of the vessel under
construction. Furthermore, in the phase of the upward shipping cycle, investors
tend to buy newbuildings or second-­hand tonnage without having sufficient
knowledge of the shipping business, thus for a period they may entrust the ship
to a manager until second-­hand prices go up so that be able to sell at a profit.
Besides, the management agreement may be used by an investor in shipping,
lacking sufficient knowledge in the trade, but intending to get familiar and then
become a ship operator in the longer term.
Therefore, the shipowner’s motives for delegating or outsourcing management
services, as well as the respective management models, may vary considerably.
238
Charter forms
At this point, having now examined the types of charter and how they work,
it would be beneficial to redefine how commercial management of ships may be
integrated within the whole management system of a shipping company, as this
is illustrated by an example in Figure 7.4.
As it may be seen, in this example there are three major divisions/­managerial
units of a shipowning company contributing mutually to the commercial result
which comes not only from vessels’ trading and operation, but also from sale
and purchase of ships. The first unit is concerned with the financial and ­corporate
­management of the company. The second unit is concerned with the operational and
technical management of the fleet. The third unit is concerned with the ­commercial
management of the fleet. In a fully integrated company all the above functions are
found in one and the same house. However, it is known that shipping is a purely
international business and many operations are multi-­national, so in this example the financial management may be effected by a fund based in Switzerland,
the operational/­technical management in Singapore, the commercial operation in
Stockholm, while the ships may be registered in and flying the flag of Panama. In
such a hypothetical case, the financial relationships and the contractual chartering
agreements between the off-­shore departments or companies involved could be the
Figure 7.4 Management of Shipping Companies
239
C harter forms
following. The Panamanian shipowning company is funded by the Swiss fund. The
ship is hired from the Panamanian shipowning company to the Singaporean operational manager under a bareboat charter. Then, the ship is let out on time charter
from the Singaporean operational manager to the Swedish commercial manager,
who in turn takes the earnings from the market, either in the form a voyage charter
rate or from another time charter or by employing the vessel in a liner trade or from
another kind of contractual employment. In this example, it is implied that all the
involved entities – apart from the last one – belong to the same shipping group. One
may imagine how complicated things may become when third party interests are
involved in these transactions or numerous sub-­charters take place.
7.6 Cost allocation per charter type
The commercial management of a ship always involves certain costs, undertakings, obligations, duties, risks and rights. The owners and the charterers have
to determine all these different elements before distributing them among themselves, when considering the charter form to be used and the necessary amendments to be made.
As to the costs involved, first the ship’s capital costs must be taken into account,
that is, return and interest with respect to own and external capital (from a cash
flow point of view the repayment of external capital must also be brought into
the picture). Then, the ship’s operating or running costs follow. The ship must be
manned, this involving wages, social costs, sickness costs, travel costs, training
costs, etc. The vessel has to be continuously maintained and repaired, while the
owner has normally insured the vessel (hull and machinery, war risks) as well as
his liability (P&I, MII). Finally, the ship’s voyage costs are considered. Bunkers
and other consumption materials (except lubricants which are typically regarded
as operating expenses) have to be paid for. Port/canal charges and other fees have
to be paid, loading and discharge must be arranged and paid for. Besides, there
are administrative costs which are dependent on the extensiveness of the business
generally and the engagement of the individual vessel.
Further to the distribution of these costs, there are also risks to be allocated.
For instance, who will bear the risk for loss of time arising from weather hindrance during the transit or in port, strikes, or political events? Who will bear
the risk for a bad freight market? When the calculation is made it is of course
necessary to pay attention to the profit or loss allocation arising.
The ship costs may be divided into fixed costs which are irrespective of the
ship’s employment and variable costs which are directly influenced by the ship’s
trading. The corresponding standard classes of costs are then: the capital costs
and the operating or running costs are generally considered as the fixed elements
of ship costs, while the voyage costs are the variable element. Additionally, it
should be remembered that ship costs may be influenced considerably by legislation applied in different countries.
Figure 7.5 and Table 7.1 show how costs, expenses and risks are allocated among
the contracting parties (shipowner and charterer) under different types of charter.
240
Charter forms
Bareboat
Charter
Costs of the charterer
Costs of the charterer
Time
Charter
Costs of the
owner
2
Costs of the owner
Costs that may
be shared in
different ways
1
Return on own and interest
on borrowed capital
Depreciation on
invested capital
Costs of the owner
Operating costs
Manning costs
Insurance (hull, war, P. & I.)
Repairs, maintenance
Administrative costs
Voyage costs
Despatch/demurrage
Loading/discharging
Stevedoring/trimming
Port charges, fees
Canal dues
Bunkers
Other voyage costs
Capital costs
Voyage
Charter
(1) Certain costs arising in connection with port calls are to be paid by charterer.
(2) Costs for manning, insurance, repairs, maintenance, etc., are sometimes shared between
the owner and charterer.
Both parties will have administrative costs.
Figure 7.5 Allocation of Costs and Risks per Charter Type
7.7 “Charter chains”
A vessel may be involved in several different charter contracts at the same time.
The following example illustrates such a “charter chain” among various parties
(persons and companies).
A is the registered (real) owner of the vessel. Since he is only interested in
investing money in shipping, he has made a management agreement with B,
whereby B will be responsible for different tasks in relation with the operation of the vessel, such as maintenance, repairs, manning, insurance, etc. B
will also have a duty to operate the ship commercially, but the commercial
risk is still vested with A, which means that a bad charter market will affect
the income of A. Instead, if A and B make a bareboat charter, B will appear
as the functional owner, and then the commercial risk will be vested with B.
Under a management agreement between A and B, B will act as agent for A or
241
C harter forms
Table 7.1 Allocation of Costs and Risks per Charter Type
Cost/Risk
Charter
Time risk in port
Loading/Unloading
Port charges
Bunkers
Time risk at sea
Soliciting for cargo
Manning
Repairs/Maintenance
Insurance
Capital costs
Bareboat Charter Time Charter Voyage Charter Liner Trade
C
C
C
C
C
C
C6
CO7
CO7
O
C
C2
C
C
C5
C
O
O
O8
O
CO1
CO3
O4
O
O
O
O
O
O8
O
O
O
O
O
O
O
O
O
O
O
C = Charterer O = Owner
1
Under a voyage charter the risk of time in port is distributed through charterparty provisions dealing
with laytime and demurrage (see chapters 11 and 15).
2
Under time charter the costs of loading and discharge lie with the charterer. The work will normally
be carried out under the supervision of the ship’s officers and the ship will give so-­called customary
assistance with the vessel’s crew.
3
Liability and costs for loading and discharging under voyage charter will be distributed differently
from case to case. Sometimes all costs will lie with the owner (liner or gross terms) and sometimes
they will rest with the charterer (fio terms or similar).
4
The owner will pay for normal port charges which rest with and are levied on the vessel, as well as
tugs, moorings etc. Certain costs resting with the cargo will according to the main principle be paid
by the charterer.
5
Some charterparties (most of all those used in oil transportation) provide that some risks of time at
sea will lie with the owner.
6
Sometimes the master and even some of the senior officers are employed by the owner.
7
As to repairs, maintenance and insurance, there are different solutions in the bareboat charterparties,
but frequently these costs lie with the charterer.
8
Even if hull & machinery, protection & indemnity, war risk and (possibly) mortgagee interest insurance are normally provided for and paid for by the owner, it is usual that the time charterer buys a
limited P&I insurance, and also, under certain circumstances, he contributes to extra hull and war
risk premiums. Under time charter and sometimes under voyage charter, the charterer may insure his
liability towards the owner through a so-­called charterer’s liability insurance.
possibly as correspondent owner. In the case of a bareboat charter between
A and B, the latter will instead act as a disponent owner or in some similar
capacity.
B, in his turn, has time-­chartered out or sublet the ship to C. In the relation
B/C, B is acting as agent for the owner, thus he is a correspondent owner or a disponent owner, while C is the time-­charterer. C in his turn has chartered the vessel
to D under a voyage charter. In the relationship C/D, C is the time chartered
owner, and D is the voyage charterer. From A’s point of view, under a bareboat
charter, B is the charterer and C and D are sub-­charterers. A has then no direct
relation with C or D. From B’s point of view C is the charterer and D is the sub-­
charterer. Conversely, from D’s point of view, C is the owner, etc. It is important
to observe that those involved in a charter chain have a basic relationship with
242
Charter forms
their contractual party only. That means that they may not even be able to identify
the other links in the chain.
It is common that such charter chains exist in the market, and, even if a party
is only contractually involved in his own relationship in the chain, it may be
important that all parties involved are aware of their respective positions when
something happens. The action of each party must be based on the contract in
which he is involved. It is also important for a charterer negotiating a sub-­charter
to take carefully into consideration the framework set by his existing charter with
the owner. In our example, when sub-­chartering the vessel to D, C must take
into consideration the terms and conditions of his charter with B. If he fails to
maintain the balance, he may face greater risks and costs in the one relationship
than he will be able to recover in the other. He may also face situations impossible to solve because charterparties may be contradictory. In other words, if C
has time-­chartered the vessel from B, and then sublets the vessel to D, ideally C
would prefer to have terms and conditions of the second charter “back-­to-­back”
with the first one.
From a practical point of view, an important factor which can lead to complications is the use of bills of lading. The bill of lading is an independent document
which, depending on the circumstances, may involve one or several of the parties
directly in relation to the cargo consignees.
243
CHAPTER 8
Chartering routines
This chapter is concerned with a substantial subject of shipbroking and chartering practice; namely the chartering negotiations. Initially, it deals with an
analytical description of chartering negotiation procedure, comprising three
stages; investigation, negotiation and drawing ­up of the charterparty. This part
is enriched with real practical examples of orders, position lists and offers illustrating the cases and the differences among the various charter types. Furthermore, the main commercial guidelines of charterparty drawing-­up are discussed.
Some examples of special chartering routines are mentioned, while finally, the
principles of chartering negotiations are introduced as guided by the Baltic Code
of Ethics and Market Practice. Throughout this chapter, great emphasis is placed
on the explanation of the chartering terminology and abbreviations. As this is
a value-­adding tool for shipbroking and chartering practitioners, it is highly
recommended this section to be read in close connection with the glossary found
at the end of the book.
8.1 Chartering negotiation procedure
A charterparty is a contract which is negotiated in a free market, subject only to
the laws of supply and demand.1 While the relative bargaining strengths of the
parties will depend on the current state of the market, shipowners and charterers
are able to negotiate their own terms free from any statutory interference. However, they will invariably select a standard form of charterparty as the basis of
their agreement, to which they will probably attach additional clauses to suit their
own requirements.
The practice of negotiation in dry cargo and tanker chartering is similar, the
main difference being the speed with which the offers and counter-offers are
exchanged. The chartering negotiations in tanker market are speedier compared
to those in the dry market.
Comparing the chartering practice in bulk market and the booking procedure
in liner market there are many differences. Liner booking procedure is normally
much simpler as the traffic is performed in accordance with previously established terms, both as to the freight and as to other conditions found in the line’s
pricing scheme. The sailing schedule gives dates for loading and discharging, a
description of the vessel, shipping documentation etc.
1 Wilson, J.F. (2010) Carriage of Goods by Sea (London, Pearson Education Ltd, 7th edition,
p. 3).
245
Chartering routines
On the other hand, the chartering negotiation procedure in the open market
can be divided into three stages, namely the stage of investigation, the stage of
negotiation and the follow-­up stage.
8.1.1 Stage of investigation
The investigation stage commences when a charterer directly or through a broker
enters the market with an order (called a cargo order).
The cargo order presents the interest of the charterer for a specific type of
charter, a specific type of trade and a specific type of vessel.2 There is also the
case where the investigation stage commences when a shipowner directly or
through a broker enters the market with a position list.
The position list presents the interest of the shipowner for a specific type of
charter and includes the particulars of the vessel as well as her geographical
position.
Circumstances may vary somewhat, depending on whether the sale/­purchase
transaction of the cargo generating the transport is finally concluded or not. This
should be evident from the wording of the order. The manner of expressing this
may be varied, but a business is considered to be complete from the point of view
of chartering technicalities only when the cargo sale is fully in order and signed,
when the documentary letter of credit is obtained (if required), when shippers
and receivers are prepared, respectively, to sell and buy the goods and when the
cargo is ready and available for shipment or can be made available for loading at
a certain specified time.
Before the charterer enters the market with the order, he has to decide if he is
prepared to commence firm freight negotiations immediately with a shipowner
or if he wishes primarily to collect suggestions for different opportunities and
intends to start negotiations only after the material gathered has been evaluated.
If the charterer is prepared to enter immediately into firm negotiations then the
order may open with the following wording:
•
•
•
•
•
FIRM . . .
FIRM ORDER . . .
CHARTERERS ARE NOW FIRM AS FOLLOWS . . .
DEFINITE, FIRM AND READY TO GO . . .
FIRM WITH LETTER OF CREDIT IN ORDER . . .
When the sale of goods has been concluded, but the charterer does not
want to enter into immediately firm negotiations, this may be indicated by
2 Throughout this section, real examples of cargo orders are presented which have been compiled
from the following sources (accessed 10 June 2016):
• www.shippingonline.cn/­chartering/­index.asp
• http://­chartering.shipsworld.com/2014/01/­open-­cargo-­offer.html
• www.ship.gr/­shipbroker/­cargoope.htm.
246
Chartering routines
marking the order FIRM or DEFINITE but at the same time with the following
words:
•
•
•
INDICATIONS ONLY
PLEASE INDICATE
PLEASE PROPOSE
On the other hand, if the purchase negotiations have not yet been concluded,
but the charterer nevertheless requires a freight quotation or at least an idea of
the prevailing freight market level, this should be shown in the order by opening
it with the words:
•
•
•
PROSPECTIVE ORDER
ORDER EXPECTED TO BECOME DEFINITE
ORDER NOT YET DEFINITE
If the charterers do not have any definite plans, but only wish to make a general
investigation of the shipping possibilities, this may be indicated by the phrases:
•
•
POSSIBILITY ONLY
CHARTERERS HAVE A POSSIBILITY TO WORK UP FOLLOWING
BUSINESS
It is not unusual for charterers to put out an anonymous order and request the
broker to keep the origin of the order secret until proposals of tonnage have been
submitted from serious owners. The broker then denominates the origin and shows
that the charterer is well known to him by “FIRST CLASS CHARTERERS (FCC)”,
“A1 CHARTERERS” or maybe “DIRECT FIRST CLASS CHARTERERS”.
These expressions cannot be used by other brokers who receive and further the
order to their contacts in turn, since they do not know the identity of the charterer.
The contents of the order will then cover those items which the shipowner
requires to make his calculations and evaluations. More specifically, the minimum of information that should be included at the cargo order of a voyage charter is the following:
•
•
•
•
•
•
•
•
CHARTERER’S NAME AND DOMICILE
CARGO QUANTITY AND DESCRIPTION OF THE COMMODITY
LOADING AND DISCHARGING PORTS
THE PERIOD WITHIN WHICH THE VESSEL IS TO BE PRESENTED FOR
LOADING (LAY/CAN)
LOADING AND DISCHARGING RATES AND TERMS
ANY RESTRICTIONS REGARDING TYPE OR SIZE OF SHIP OR AGE OR
FLAG
C/P FORM ON WHICH THE CHARTERER WISHES TO BASE THE TERMS
AND CONDITIONS
COMMISSIONS TO BE PAID BY THE OWNER
247
Chartering routines
This is the absolute minimum of information required to get an owner interested and to make calculations and evaluations. If one or more of the items above
are not given by the charterer (shipper), his forwarder or broker, then the owners
are left with something they have no means of calculating and evaluating, so that
order will most likely be put aside or dropped completely. Apart from this, the
presentation of a faulty or incomplete order gives a very unprofessional impression. In addition to items in the checklist above, the charterer may also mention
the approximate freight level that he wants to have as a starting point for the
discussion or the negotiation (the charterer’s freight idea), but such information
is often omitted from the original order for reasons of negotiation tactics.
An example of a cargo order at a voyage charter is the following:
FCC REQUESTS OWNER’S COMPETITIVE RATES FOR THE FOLLOWING
FIRM ORDER:
35–40 000 MTS 5% MOLCO COAL IN BULK, SF ABOUT 1.3
POL AT ANCHORAGE AT NEVELSK, SAKHALIN ISLAND RUSSIA
POD AT BERTH TAICHUNG OR TAIPEI OR KAOHSIUNG, TAIWAN
IN CHOPT
LAYCAN 10–15 JUNE 2015, TRY VESSEL’S DATES IN JUNE
LD/DIS RATE 3000 MTS WWD SSHEX UU / 6000 MTS WWD SHINC
LOADING AND DISCHARGING BY SHIP’S GEARS
FREIGHT INVITE OWNERS BEST FIOT
GENCON ’94 CP
COMM 2.5%
This order concerns a first-­class charterer’s (FCC) interest for a geared vessel to execute a voyage charter carrying in bulk coal of about 35,000–40,000
mt (MTS), 5% more or less on charterers’ option (MOLCO), with about 1.3
stowage factor (SF ABOUT 1.3), from an anchorage at Nevelsk in Russia,
which would be the port of loading (POL AT ANCHORAGE AT NEVELSK,
SAKHALIN ISLAND RUSSIA), to a berth at Taichung or Taipei or Kaohsiung
in Taiwan, which would be the discharging port in charterers’ option (POD AT
BERTH TAICHUNG OR TAIPEI OR KAOHSIUNG, TAIWAN IN CHOPT).
The vessel should be available at the port of loading on 10–15 of June 2015
(LAYCAN 10–15 JUNE 2015); after this date the charterer could opt to cancel
the charterparty. The rate of loading would be 3,000 mt per weather working
day, Saturdays, Sundays and holidays excluded from laytime3 unless used; the
rate of discharging would be 6,000 mt per weather working day Sundays and
holidays included in laytime (LD/DIS RATE 3000 MTS WWD SSHEX UU /
6000 MTS WWD SHINC). The loading and discharging operations would be
undertaken by the ship’s gears (LOADING AND DISCHARGING BY SHIP’S
GEARS). The charterer invited the owner to make a freight offer (FREIGHT
INVITE OWNERS BEST) by taking into consideration that charterer would
3 See further analysis of voyage charter in chapter 11 and laytime calculation in chapter 15.
248
Chartering routines
be willing to pay the cargo-handling expenses (FIOT stands for “Free, In, Out
and Trimmed” terms). So, the freight would include the sea carriage but not
the loading, discharging and trimming expenses. The preferred charterparty
form was the Gencon ’94 (GENCON ’94 CP). The commission which should
be paid by the shipowners is 2.5% (COMM 2.5%). Since the order was firm
(FCC REQUESTS OWNER’S COMPETITIVE RATES FOR THE FOLLOWING FIRM CARGO), the charterer would be willing to enter immediately into
firm negotiations.
Another example of a cargo order at a voyage charter is the following:
FCC REQUESTS OWNER’S PROPOSAL FOR:
BGE 500 MTS
L-DAESAN PORT, KR
D-KHH PORT, TAIWAN (W/#28 OR W/#30)
END JUNE 2015
L RATE: 80 MT/PH
D RATE: 80 MT/PH DISCHARGE SHINC REV
STAINLESS HULL REQUIRED
DWT: MIN 600 TO MAX 10000
IDEAL FREIGHT IS $57 USD/PER MT
PLS PPS C/P
COMM: 2.5%
This order concerns a first-­class charterer’s (FCC) interest for a chemical vessel
to execute a voyage charter carrying chemical cargo butyl glycol ether (BGE) of
about 500 mt (MTS), from the port of Daesan in Korea, which would be the port
of loading (L-DAESAN PORT, KR) to the Kaohsiung port at TAIWAN (D-KHH
PORT, TAIWAN), which would be the discharging port, at wharf 28 or wharf
30 (W/#28 OR W/#30). The vessel should be available at the port of loading
at the end of June (END JUNE 2015); after this date the charterer could opt to
cancel the charterparty. The rate of loading would be 80 mt per hour (L RATE:
80 MT/PH); the rate of discharging would be 80 mt per hour Sundays and holidays included in laytime reversible4 (D RATE: 80 MT/PH DISCHARGE SHINC
REV). The charterer required a stainless chemical vessel of about 600–10,000
deadweight tons (STAINLESS HULL REQUIRED, DWT: MIN 600 TO MAX
10000). Furthermore, the charterer suggested a freight of USD 57 mt of chemical
cargo shipped onboard the vessel (IDEAL FREIGHT IS $57 USD/PER MT).
The charterer asked for the suggestion of the shipowners regarding the form of
charterparty that would be used (PLS PPS C/P). The commission that should be
paid by the shipowners is 2.5% (COMM: 2.5%). The charterer required from
the shipowner a proposal (and not a firm offer), which means that the charterer
was not willing to enter immediately into firm negotiations (FCC REQUESTS
OWNER’S PROPOSAL).
4 See appendix 3 for a definition of reversible laytime.
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An order concerning a time charter engagement is presented on the market in
largely the same way as for voyage chartering, with the exception that details
about cargo, ports, loading and discharging rates and terms are exchanged for
details about the vessel, the intended trade, duration of time charter period and
places for delivery and redelivery.
In the cargo order of a time charter, the minimum of information required to
get an owner interested is the following:
•
•
•
•
•
•
•
CHARTERER’S NAME AND DOMICILE
PLACES OF DELIVERY AND REDELIVERY OF VESSEL
THE TIME CHARTER PERIOD
DETAILS ABOUT THE INTENDED TRADE
ANY RESTRICTIONS OR PREFERENCES REGARDING THE TYPE OR
SIZE OF SHIP
C/P FORM ON WHICH THE CHARTERER WISHES TO BASE THE TERMS
AND CONDITIONS
COMMISSIONS TO BE PAID BY THE OWNER
An example of a cargo order at a time charter is the following:
ACCT “TRADEBUSINESS” OPEN FOR FOLL:
T/C PERIOD: 12 MONTHS, 15 DAYS −/+ CHOPT
SIDBC/TWEEN MPP – 14 UP TO 22000 DWAT – MAX 24 YEARS OLD – GOOD
GEARED
DEL ANY MED AND OR BLACKSEA
REDL MEDSEA AND OR P.G CHOPT
LAYCAN: 26TH DEC 14
TRADING AREAS: MEDSEA, REDSEA, P.G. EXCL IRAQ BUT IRAN
INCLUDED, W.E.C INDIA INCL COLOMBO, WEST AND EAST AFRICA
CGO: MAINLY STEEL, BULK AND OR BGD MINERALS, BGD CGOES, FOOD
STUFF, ANIMAL FEED BULK FERTS, TIMBER, IRON ORE, GENERALS,
LAWFUL CGO NON DANGEROUS
HIRE DEPENDS ON VESSEL’S CONSUMPTION, SPEED
BUNKER CL TO BE MUTUALLY AGREED
2.5 PCT TTL HERE
OWISE NYPE
This cargo order concerns a charterer’s interest (the name of the charterer is
“Tradebusiness”) for a good geared single deck bulk carrier (SIDBC) or tween
deck multi-­purpose (TWEEN MPP) of 14,000 up to 22,000 deadweight all told
tonnage (14 UP TO 22000 DWAT) and of maximum 24 years old to charter for
a one-year time charter period. The vessel would be redelivered to the shipowner about 15 days before or after the expiration of the one-year flat period
at charterer’s option (T/C PERIOD: 12 MONTHS, 15 DAYS −/+ CHOPT).
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The vessel would be delivered to the charterer in any geographical area in the
Mediterranean Sea or in the Black Sea (DEL ANY MED OR BLACKSEA)
and it would be redelivered to the shipowner in any geographical area in the
Mediterranean Sea or in the Persian Gulf at charterer’s option (REDL MEDSEA
AND OR P.G CHOPT). The vessel should be delivered until 26 December 2014
(LAYCAN: 26TH DECEMBER 2014); after this date the charterer can opt to
cancel the charterparty. The trading areas where the vessel would be employed
include the Mediterranean Sea, the Red Sea, the Persian Gulf excluding Iraq
and including Iran, the West and East Coast of India including Colombo and the
West and East Africa (TRADING AREAS: MEDSEA, REDSEA, P.G. EXCL
IRAQ BUT IRAN INCLUDED, W.E.C INDIA INCL. COLOMBO, WEST
AND EAST AFRICA). The charterer had the intention to ship mainly steel,
bulk and/­or bagged minerals, bagged cargoes, food stuff, animal feed, bulk
fertilisers, timber, iron ore, generals and any lawful cargo; he had no intention to ship dangerous goods (CGO: MAINLY STEEL, BULK AND OR BGD
MINERALS, BGD CGOES, FOOD STUFF, ANIMAL FEED, BULK FERTS,
TIMBER, IRON ORE, GENERALS, LAWFUL CGO NON DANGEROUS).
The charterer stated that the amount of hire will be determined in accordance
with the vessel’s fuel consumption and the ship’s speed (HIRE DEPENDS ON
VESSEL’S CONSUMPTION, SPEED). The bunker clause at the charterparty
would be agreed mutually among the shipowner and the charterer (BUNKER
CL TO BE MUTUALLY AGREED). The commission which should be paid
by the shipowner is 2.5% total (COMM 2.5 PCT TTL HERE). The preferred
charterparty form was the NYPE except the case where another charterparty
form would be suggested by the shipowner (OWISE NYPE). The charterer
was willing to enter immediately into firm negotiations (PLS OFFER OPEN
TONNAGE SUITABLE FOR).
Another example of a cargo order at a round voyage time charter is the
following:
FCC KINDLY REQUESTS OFFER OF SUITABLE VSL FOR BELOW ORDER:
NEED SUPRAMAX
TC ROUND DEL BANDAR ABBAS, REDL BANDAR ABBAS
CARGO: IRON ORE
QUANTITY: ABOUT 55000 MT
LOAD PORT: BANDAR ABBAS – IRAN
DISCHARGE PORT: MAIN PORT OF CHINA
LAYCAN: 10TH OF MAY 2014
LOAD/DISCH RATE: 7000/15000
COMM 1.25% ADCOM 1.25%
OWISE NYPE
This cargo order concerns a first-­class charterer’s (FCC) interest for a supramax
vessel (NEED SUPRAMAX) to charter for a round voyage time charter (TC
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ROUND). The vessel would be delivered and redelivered at Bandar Abbas in
Iran (DEL BANDAR ABBAS, REDL BANDAR ABBAS). The latest date of
delivery is 10 May 2014 (LAYCAN: 10TH MAY 2014); after this date the charterer can opt to cancel the charterparty. The vessel would be used for the carriage
of 55,000 mt iron ore from Bandar Abbas (the loading port), to a main port in
China (the discharging port). The rate of loading will be 7,000 mt and the rate
of discharging will be 15,000 mt (LOAD/DISCH RATE: 7000/15000). The brokerage commission which should be paid by the shipowner is 1.25% as well as
an address commission of 1.25% is payable (COMM 1.25% ADCOM 1.25%).
The preferred charterparty form was the NYPE except the case where another
charterparty form would be suggested by the shipowners (OWISE NYPE).
The charterer asked from the shipowner his offer for a vessel suitable for his
cargo order (KINDLY REQUESTS OFFER OF SUITABLE VSL FOR BELOW
ORDER), which means that the charterer was willing to enter immediately into
firm negotiations.
The minimum of information that should be included in the cargo order of a
COA charter is the following:
•
•
•
•
•
•
•
CHARTERER’S NAME AND DOMICILE
CARGO QUANTITY (IN TOTAL AND PER SHIPMENT) AND DESCRIPTION OF THE COMMODITY
LOADING AND DISCHARGING PORTS
THE PERIODS WITHIN WHICH THE VESSEL IS TO BE PRESENTED
FOR LOADING
LOADING AND DISCHARGING RATES AND TERMS
C/P FORM ON WHICH THE CHARTERER WISHES TO BASE THE TERMS
AND CONDITIONS
COMMISSIONS TO BE PAID BY THE OWNER
An example of a cargo order at a CoA charter is the following:
FCC REQUESTS OFFER FIRM FOR:
500000 MT OF AGGREGATE LIMESTONE (SF 1.4–1.8)
UAE/BAHRAIN
20,000–30,000 MT PER SHIPMENT
LAYCAN 20–25 NOVEMBER 2014
GENCOA C/P
ADDCOM 1.25% + COMM 1.25%
This order concerns a first-­class charterer’s (FCC) interest for a vessel to execute
a CoA charter carrying an aggregate limestone quantity of 500,000 mt (MT) with
1.4–1.8 stowage factor (SF 1.4–1.8). The loading port or ports would be a port
or ports in United Arab Emirates (UAE) and the discharging port or ports would
be a port or ports in Bahrain. The charterer asked for consecutive shipments of
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Chartering routines
20,000–30,000 mt each. The vessel should be initially available at the port of
loading on 20–25 November 2014 (LAYCAN 20–25 NOVEMBER 2014); after
this date the charterer could opt to cancel the charterparty. The preferred charterparty form was the Gencoa (GENCOA C/P). The shipowner would be responsible for the payment of 1.25% commission (COMM 1.25%) and 1.25% address
commission (ADDCOM 1.25%). The charterer was willing to enter immediately
into firm negotiations (FCC REQUESTS OFFER FIRM).
Another (more analytical) example of a cargo order at a CoA charter is the
following:
FCC REQUESTS OFFER FIRM FOR:
COA FOR 1YEAR FROM 1ST JANUARY 2009
LOOKING FOR TANKER FOR LOADING CRUDE PALM OIL IN BULK
CARGO/QTY: 25000 +/− 5% OWNERS OPTION, 1–3 GRADES CRUDE PALM
OIL (SP. GR 0.85–0.89 APPROX, HEATED, 55, DEG C) PRODUCTS (EXCEPT
PALM FATTY ACID)
OWNERS MAY NOMINATE OTHER TONNAGES FROM THEIR FLEET AT
A LATER STAGE BUT SUCH VESSELS SHOULD BE OF SIMILAR OR ­BETTER
CONDITION IN ALL RESPECTS.
SHIPMENT: 1 SHIPMENT CONSECUTIVELY PER MONTH OF 25000 MTS
WITH 5PCT MOLOO SHIPMENT
LOADPORTS: 1 OR 2 SP/SB DUMAI/BELAWAN/LUMUT/PASIR
GUDANG/BUTTERWORTH/PORT KLANG
DISPORTS: 1/2 SB HOUSTON PORT – TEXAS, USA
LAYTIME: 165 MTPH FOR LOAD PORT, 165 MTPH FOR DIS PORT
L/D SHINC REVERSIBLE
FRT IDEA OFFER: USD 68 PMT (TO BE SAME RATES EVERY VOYAGE)
NO DEADFREIGHT ON CHRTRS ACCOUNT PROVIDED MINM QTY
SUPPLIED.
INTERCOA C/P
COMM 2.5% BROKERAGE
This order concerns a first-­class charterer’s (FCC) interest for a tanker vessel
to execute a year CoA charter starting on 1 January 2009 (COA FOR 1YEAR
FROM 1ST JANUARY 2009). The tanker would carry in bulk crude palm oil
products (except palm fatty acid) of 1–3 grades, of specific gravity 0.85–0.89 and
heated at 55 degrees Celsius (SP. GR 0.85–0.89 APPROX, HEATED, 55, DEG
C). The shipowner might nominate and use other tankers (from his fleet) at a later
stage but such vessels should be appropriate for the execution of the CoA charter
(OWNERS MAY NOMINATE OTHER TONNAGES FROM THEIR FLEET
AT A LATER STAGE BUT SUCH VESSELS SHOULD BE OF SIMILAR OR
BETTER CONDITION IN ALL RESPECTS). The charter concerned consecutive monthly shipments of 25,000 mt with 5% more or less on shipowners option
(SHIPMENT: 1 SHIPMENT CONSECUTIVELY PER MONTH OF 25000 MTS
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Chartering routines
WITH 5PCT MOLOO SHIPMENT). The loading ports would be one or two
safe ports or berths (LOADPORTS: 1 OR 2 SP/SB) in Dumai, Belawan, Lumut,
Pasir, Gudang, Butterworth, Port Klang. The discharging ports would be one
or two safe berths at Houston Port in Texas (DISPORTS: 1/2 SB HOUSTON
PORT – TEXAS, USA). The rate of loading and discharging would be 165 mt
per hour, Sundays and holidays included in laytime; the laytime would be reversible (LAYTIME: 165 MTPH FOR LOAD PORT, 165 MTPH FOR DIS PORT,
L/D SHINC REVERSIBLE). The freight rate suggested by the charterers was
USD 68 per mt of cargo shipped onboard the tanker. This rate should be the
same during the execution of all voyages of the CoA charter (FRT IDEA OFFER:
USD 68 PMT, TO BE SAME RATES EVERY VOYAGE CONTRACT). The
charterer was not willing to pay deadfreight in case where no full and complete
cargo was loaded onboard provided he has shipped the minimum agreed quantity
of cargo (NO DEADFREIGHT ON CHRTRS ACCOUNT PROVIDED MINM
QTY SUPPLIED). The vessel should be available at the port of loading on 1
January 2009; after this date the charterer could opt to cancel the charterparty.
The preferred charterparty form was the INTERCOA (INTERCOA C/P). The
commission which should be paid by the shipowner was 2.5% (COMM 2.5%
BROKERAGE). The charterer was willing to enter immediately into firm negotiations (FCC REQUESTS OFFER FIRM).
Moreover, the minimum of information that should be included in the cargo
order of a bareboat charter is the following:
•
•
•
•
•
•
•
CHARTERER’S NAME AND DOMICILE
PLACES OF DELIVERY AND REDELIVERY OF VESSEL
THE CHARTER PERIOD
DETAILS ABOUT THE INTENDED TRADE
ANY RESTRICTIONS OR PREFERENCES REGARDING THE TYPE, SIZE,
AGE OR FLAG OF SHIP
C/P FORM ON WHICH THE CHARTERER WISHES TO BASE THE TERMS
AND CONDITIONS
COMMISSIONS TO BE PAID BY THE OWNER
An example of a cargo order at a bareboat charter is the following:
FCC REQUESTS OFFER FIRM FOR:
MPP VESSEL, NON OVERAGED
FOR B/B PERIOD 2 YEARS + 1 YEAR AT CHOPT
DELY ANY MED TRY BLACK SEA
LAYCAN 20–30 JUNE 2015
REDEL WITHIN TRADING LIMITS
TRADING WORLDWIDE
INTENTION NON DANGEROUS GENERALS
BARECON C/P
COMS 5% TTL HERE
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Chartering routines
This order concerns a first-­class charterer’s (FCC) interest for hiring under a
bareboat charter a non-­overaged multi-­purpose vessel (MPP VESSEL). The
bareboat charter period would last two years with a possibility of charter’s
renewal for one year more at charterer’s option (FOR B/B PERIOD 2 YEARS
+ 1 YEAR AT CHOPT). The vessel would be delivered at any geographical
area in the Mediterranean Sea or preferably in the Black Sea (DELY ANY
MED TRY BLACK SEA) and redelivered at any geographical area within
the trading limits of ship’s employment (REDEL WITHIN TRADING LIMITS). The vessel should be delivered on 20–30 June 2015 (LAYCAN 20–30
JUNE 2015); after this date the charterer could opt to cancel the charterparty.
The ship would be employed worldwide. Furthermore, the intention of the
charterer was to not ship dangerous general cargoes. The preferred charterparty
form was the BARECON (BARECON C/P). The commission which should be
paid by the shipowner was 5% (COMM 5% TTL HERE). The charterer was
willing to enter immediately into firm negotiations (FCC REQUESTS OFFER
FIRM).
As it has been mentioned, sometimes the investigation stage commences when
a shipowner directly or through a broker enters the market with a position list.
The contents of the position list cover the following items:
•
•
•
•
•
•
•
•
SHIPOWNER’S NAME AND DOMICILE
DESCRIPTION OF THE VESSEL
THE PERIOD WITHIN WHICH THE VESSEL IS AVAILABLE
TYPE OF CHARTERING (VOYAGE, CONSECUTIVE VOYAGES, TIME,
BAREBOAT, COA)
LOADING AND DISCHARGING RATES AND TERMS
ANY RESTRICTIONS OR PREFERENCES REGARDING TYPE OF
CARGO
C/P FORM ON WHICH THE SHIPOWNER WISHES TO BASE THE TERMS
AND CONDITIONS OF CARRIAGE
COMMISSIONS TO BE PAID BY THE OWNER
An example of a position list is the following:
OWNER REQUESTS CHARTERER’S PROPOSAL FOR THE BELOW VSL FOR
V/C
OPEN AT NORTH KOREA ON 6 JUNE 2015
BULK CARRIER
3960 DWT, FLAG: CAM, BUILT NORWAY 2008
GRT/NRT: 2355/1318, LOA/D/BM: 89.50/13.8/6.4M 2H / 2H
G/B CAPACITY: 4800CBM, HATCH SIZE: NO 1: 25.8M*10.20M NO.2: 25.2*
10.20M
HOLD SIZE: NO.1: 30.6M*10.2M NO.2: 25.2M*10.2M
TRADING AT CHINA/JAPAN/S.KOREA/N.KOREA/RUSSIA/FAR EAST
NOT SHIP DANGEROUS GOODS
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Chartering routines
This position list presents a shipowner’s interest for voyage chartering his small
bulk carrier (THE BELOW VSL FOR V/C), open at North Korea on 6 June 2015.
The vessel was built in Norway in 2008 (BUILT NORWAY 2008) and has the
dimensions of length overall, draught and beam as described in the position
list. Besides, it has two holds and two hatches (LOA/D/BM: 89.50/13.8/6.4M
2H / 2H). Her deadweight tonnage is 3,960 tons, her gross registered tonnage is
2,355 tons and her net registered tonnage is 1,318 tons (GRT/NRT: 2355/1318).
The size of the first hold is 30.6 metres × 10.2 metres and the size of the second hold is 25.2 metres × 10.2 metres. The size of the first hatch cover is 25.8
metres × 10.2 metres and the size of the second hatch cover is 25.2 metres ×
10.2 metres. The total grain and bale capacity of the ship is 4,800 cubic metres
(G/B CAPACITY: 4800CBM). The intention of the shipowner was for the vessel
to be employed in trading areas such as China, Japan, South Korea, North Korea,
Russia and the Far East. Furthermore, the shipowner was not willing to ship dangerous goods on his vessel.
8.1.2 Stage of negotiation
When the owner deems the received order to be worth considering, he reverts to
the broker or, in case the order was received direct, to the charterer. The owner
will normally contact the broker who first brought the order. If a number of brokers have presented the order at about the same time, the one who is “closest” to
the charterer is contacted or, in any case, the one who is supposed to be in the best
position to negotiate with the charterer in question for the owner’s account. The
latter can express his interest in various ways. More often, the owner presents his
ship and his abilities to meet with the intentions according to the order and submits a freight indication. He is still uncommitted with regard to the figures and
terms mentioned, but such an indication will advise the charterer of the owner’s
starting point for a possible negotiation.
Furthermore, the charterer can compare the freight quoted with his own
opinion about the proper freight level and can also compare it with suggestions
made by other owners. An indication is often given without any time limit since
it will not commit the parties. Still the owner is supposed to present – if and
when submitting a firm offer later on – freight and terms that are no worse for
the charterer than those initially indicated by him. Alternatively, the owner can
give the charterer a fairly rough suggestion just in order to sound out the basis
for a possible negotiation and let this proposal be accompanied by a so-­called
freight idea. This will certainly indicate a freight level which the owner considers to be suitable as a basis for further discussions, but which may be adjusted
upwards or downwards in an eventual offer, when the owner has made more
careful calculations.
A proposal, a freight idea or an indication form part of the negotiation stage and
form a basis for the charterer’s calculations and evaluations of chartering possibilities. The charterer may go on discussing with a number of owners their own
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Chartering routines
proposals, ideas and indications until he finds a suitable counterpart for negotiations. The charterer will then revert to this owner asking for a firm offer on
the basis of the conditions given in the order or in accordance with the previous
discussions. It may happen that the charterer will reply to the owner’s indication
with a firm offer.
If the cargo order of the charterer is firm, the owner may choose to make a firm
offer right away. This can be done when the trade is well known and the freight
level is more or less established and when the ship’s size and position fits in well
with the conditions given in the order. A firm offer may also be the most suitable when the owner expects keen competition, especially in a declining freight
market.
The first official offer in chartering negotiations is usually made by the shipowner and is called the firm offer. This is not an unbreakable rule and, as it has
been mentioned, there is nothing to stop a charterer opening the proceedings. The
stage of chartering negotiation procedure starts when the first firm offer is structured. Then offers and counter-­offers from each side will follow until everything
has been agreed. There is a distinction between offers and counter-­offers. When
the recipient of an offer accepts it in its entirety then a contract has been concluded. If, however, the recipient replies rejecting the offer entirely but making a
proposal to the other party, then that also is an offer. If the recipient replies to the
offer accepting some parts of the proposal, but rejecting or amending other parts
of it, then that is a counter-­offer.
The two sides usually come together through respective brokers of the open
market which are called “competitive brokers”, although many shipowners
and charterers have specialised chartering departments in their own companies
staffed with so called “in-­house brokers”. Negotiations must be conducted with
care and accuracy.
The negotiation stage can be divided into two parts (phases). The first part concerns the negotiation of the main terms. During this part, the charterer’s broker
will give to the owner’s broker the charterparty on which the charterer wishes to
base the negotiations and it will then be the job of the owner’s broker to study
the charterparty and discuss it with his owner. The second part concerns further
negotiations about the details and the wording of the clauses which have not
been taken up during the first part. There has to be complete agreement on all of
the terms and details between the two principals for an enforceable contract to
come into being.
8.1.2.1 Negotiation of main terms
A “firm offer” should be limited as to time and definite as to terms. Opening “firm
offers” are normally based on the main terms and such offers are made subject
to agreement of further terms and conditions of charter. In many cases there is a
variety of “subjects” to be lifted before a charter is concluded.
The firm offer in voyage charter should indicatively contain the following
information:
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Chartering routines
•
•
•
•
•
•
•
•
•
•
•
•
THE SHIP’S NAME AND PARTICULARS (DESCRIPTION)
NAME OF THE SHIPOWNERS
CARGO QUANTITY AND DESCRIPTION OF THE COMMODITY
LOADING AND DISCHARGING PORTS AND BERTHS
LAYDAYS/CANCELING DAY (LOADING NOT TO COMMENCE BEFORE
THE FIRST DATE AND THE CHARTERERS HAVING THE OPTION TO
CANCEL THE CHARTER IF THE SHIP DOES NOT PRESENT ITSELF
BEFORE THE SECOND DATE)
LOADING AND DISCHARGING RATES AND TERMS (THE RATES OF
LOADING AND DISCHARGING, INCLUDING A REFERENCE AS TO
HOW TIME WILL COUNT, E.G. 12000/9000 SHEX).
DEMURRAGE AND DESPATCH RATES
FREIGHT AMOUNT AND CONDITIONS FOR PAYMENT OF FREIGHT
CLAUSES GOVERNING TIME COUNTING AND COMMENCEMENT
OF LAYTIME, BUNKER CLAUSE, CLAUSES GOVERNING EXTRA
INSURANCE PREMIUMS, TAXES, DUES, ETC., WHICH THE OWNER
CONSIDERS TO BE OF PRIME IMPORTANCE
CHARTERPARTY FORM TO BE USED
TOTAL COMMISSIONS
REPLY TIME
There are certain differences from the details enumerated above when tanker
chartering on voyage basis is concerned, where the most important are:
• loading and discharging rates are not given separately but as a number
of total days (hours) for loading and discharge (“laytime allowance all
purposes”); and
• the freight rate is normally given by reference to Worldscale (see sections 14.3.1, 14.3.2).
It has for many years been the custom for brokers to record the progress
and details of negotiations in a “day book”.5 This can provide a check­list as
to the agreed position and outstanding issues and can later, in the event of a
dispute, be used to safeguard their own and their principal’s position. However,
in the modern office environment there is less reliance on paper documents and
copies of e-­mails, instant messaging exchanges and the like may represent an
equivalent of a day book. It is essential that such correspondence is recorded
and retained for a reasonable period of time, at least until the charterparty has
ended and all matters have been finalised. An offer check list of a voyage charter follows. It includes alternative wordings that may be used in negotiations.
Voyage charter terms, calculations and practice are discussed in chapters 11,
14 and 15.
5 The Baltic Exchange (2014) The Baltic Code 2014 (p. 18).
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Checklist 1: Offer / Indication (Main Terms)
VOYAGE CHARTER
Off/Ind from
Off/Ind to
We/Account..................................................................indicate/­offer firm as follows:
Account ........................................................................Charterers/Owners
whom please name in full on replying, for Owners/Charterers
approval,.....................................................................................
Ship
Vessel/­s “........................................................................” or Owners option
substitute, “as described”, with all details “about”, viz.: Year built.............................
Flag................, Dwat..................., Cubic cap grain/bale........./.........., Gear...........,
Holds/Hatches............... /.................., Other details....................................
Vessel subjects Subject Rearranging schedules/Availability of bunkers /.........................
Cargo
For a full/­part cargo about Min/Max.....................ltons/­mtons with 5 / 10 % moloo,
Loading
Discharge
Conditions
Laydays
L/D terms
Freight
Payment
Taxes/­dues
Dem/Desp
Agents
Spec. clauses
C/P form
Commission
Subjects
Reply
commodity................................, with stowfactor......................................................
Loading 1/2 good and safe berth/­s, 1/2 good and safe port/­s...................................
in rotation.....................................................
Discharging 1/2 good and safe berth/­s, 1/2 good and safe port/­s............................
in rotation...................................................................................
Ports/­berths to be always accessible and vessel to remain always safely afloat.............
Lay/­can......................................................................................
Rate of load/­discharge................. /.......................ltons/mtons daily/­per wh/­per day
of 24 running hours, SHEX/FHEX/SHINC/FHINC/Scale load.......... uu/­eiu...........
wp, non-­reversible/­reversible,......... Any time lost in waiting for berth at or off the port,
whether in berth/­port or not, to count as loading/­discharging time without exceptions.
All costs for shifting between berths to be for Charterers/Ows account, any time
used to count/­not to count, as load/­discharge time,...................................................
Freight rate................., per lton/­mton/­lumpsum/­cbm fios/­fiot/­liner terms................,
gross/­net intaken/BL weight/­cubic.
Freight additional/­s.................................... Bunker/Freight scale/­clause....................
Freight to be................... % prepaid on signing/­releasing BL/­after............... days of
issuing BL, and balance upon.................................
All taxes and/­or dues on cargo and/­or freight ................................................ freight
tax, to be for Charterers/Owners account ...................................................................
Demurrage............................... per day or pro rata with free/­half despatch, working
time/­all time saved both ends.....................................................................................
Owners/­charterers agents both ends............................................................................
War risk clauses...................... /.................... clauses to apply in full
......................... C/P......................... subject to all further details
.................................... % total commission your end, including..............% address
Subject to.........................................................
This is firm for reply here................................................. hours our time,
Date............................................................................................
END OFFER
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NOTES:
Brokers/Owners/Charterers comments are................................
................................................................................................................................
................................................................................................................................
................................................................................................................................
................................................................................................................................
The firm offer in a time charter should indicatively contain the following
information:
•
•
•
•
•
•
•
•
•
•
•
•
•
THE SHIP’S NAME AND OTHER IDENTIFYING DETAILS
OTHER DETAILS OF THE SHIP SUCH AS TOTAL DEADWEIGHT; GRAIN
AND BALE CUBIC CAPACITIES; NUMBER OF DECKS; NUMBER OF
HOLDS AND HATCHES; NUMBER AND CAPACITIES OF DERRICKS
OR CRANES, THE SHIP’S SPEED AND DAILY FUEL CONSUMPTION
EXPRESSED AS SO MANY KNOTS ON SO MANY TONS OF WHATEVER
TYPE OF FUEL THE SHIP USES
NAME OF THE SHIPOWNERS
DESCRIPTION OF THE TIME CHARTER ENGAGEMENT
PLACE OF DELIVERY OF THE VESSEL TO THE CHARTERER (OFTEN
AN EXACT PLACE) AND PLACE OF REDELIVERY TO THE SHIPOWNER
(OFTEN A RANGE OF PORTS)
LAYDAYS/CANCELING DAY FOR THE DELIVERY (DELIVERY OF
VESSEL NOT BEFORE A CERTAIN DATE AND THE CHARTERERS’
OPTION TO CANCEL IF VESSEL DELIVERED LATER THAN A
CERTAIN DATE)
INTENDED TRADE WITH GEOGRAPHICAL & TRADING LIMITS FROM
THE OWNER’S SIDE
QUANTITY AND PRICE OF BUNKERS ON BOARD ON DELIVERY &
REDELIVERY OF THE SHIP
HIRE AND CONDITIONS FOR HIRE PAYMENT (STATING WHETHER
IT IS TO BE PAID MONTHLY OR SEMI-MONTHLY AND ALWAYS IN
ADVANCE)
OTHER CLAUSES WHICH THE OWNER WISHES TO NEGOTIATE AS
MAIN TERMS
CHARTERPARTY FORM TO BE USED
TOTAL COMMISSIONS
REPLY TIME
An offer checklist of a time charter follows. It includes alternative wordings
that may be used in negotiating the chartering terms. Time charter terms, calculations and practice are analytically explained in chapters 12 and 14.
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Checklist 2: Offer/Indication (Main Terms)
TIME CHARTER
Off/Ind from
Off/Ind to
Ship
Employment
Trading
Duration
Limits/Excl
Vessel limit
Delivery
Redelivery
Laydays
Hire
Bunkers
Spec. clauses
C/P form
Commission
Subjects
Reply
We/Account............................................................................ indicate/­offer firm
as follows:
Account.................................................................................. Charterers/Owners,
whom please name in full on replying, for Owners/Charterers approval
Vessel/­s “............................................................. ” or Owners option substitute, “as
described”, with all details “about”, viz.: Year built........, Flag......, Dwt....... SF/SW ...,
Cubic cap. grain/­bale......... /........, Gear........, Holds/Hatches....... /......., Speed........
Consumption FO/DO/­grades...... /...... /......
For one T/C-trip R/V T/C-period..................................... via port/­s......................................
Intended cargo/­trade ..................................................................
............................ days without guarantee/­period with +/– days............................
in Charterers’/Owners’ option
Always with INL, trading exclusions.................., cargo exclusions.........................
Vessel is sailing under ITF agreement or equivalent, not blacklisted, ISM,...............
Delivery any time day/­night SHINC at/­tip.................................................................
Redelivery.............../­dop................, within ..................................................... range
Lay/­can........................................................................................
Rate of hire..................... per day/­monthly .................... per Dwt/­cft, incl/­excl overtime ......................................monthly or pro rata in advance ...................................
Bunkers on delivery/­redelivery FO/DO......... /........ tons, at.................................. /
............, same quantities/­prices..................................................................................
Clauses................................................................ to apply in full..............................
C/P...................................................................................... subject all further details
............................... % total commission your end including .......... % address
Subject to Charterers approval of plan/­inspection/ ...............................................
This is firm for reply here................................................................. hours our time,
date.............................................................................................................................
END OFFER
NOTES:
Brokers/Owners/Charterers comments are................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
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The firm offer in a bareboat charter should indicatively contain the following
information:
•
•
•
•
•
•
•
•
•
•
•
•
THE SHIP’S NAME AND PARTICULARS (DESCRIPTION)
NAME OF THE CHARTERERS
DESCRIPTION OF THE BAREBOAT CHARTER ENGAGEMENT
PLACE OF DELIVERY OF THE VESSEL TO THE CHARTERER (OFTEN
AN EXACT PLACE) AND PLACE OF REDELIVERY TO THE SHIPOWNER
(OFTEN A RANGE OF PORTS)
LAYDAYS/CANCELING DAY FOR THE DELIVERY (DELIVERY DATE
OF VESSEL NOT BEFORE A CERTAIN DATE AND THE CHARTERERS
OPTION TO CANCEL IF VESSEL DELIVERED LATER THAN A CERTAIN
DATE)
INTENDED TRADE WITH GEOGRAPHICAL LIMITS AND OTHER
TRADING LIMITS FROM THE OWNER’S SIDE
HIRE AND CONDITIONS FOR HIRE PAYMENT (STATING WHETHER
IT IS TO BE PAID MONTHLY OR SEMI-MONTHLY AND ALWAYS IN
ADVANCE)
CLAUSES NEGOTIATED AS MAIN TERMS
CHARTERPARTY FORM TO BE USED
TOTAL COMMISSIONS
INSURANCE CLAUSE
REPLY TIME
An offer checklist at a bareboat charter follows. It includes alternative wordings that may be used in negotiating the charter terms. Bareboat charter terms are
discussed in chapter 13.
Checklist 3: Offer/Indication (Main Terms)
BAREBOAT CHARTER
Firm for reply by.....................................................................................................................................
For account of [name and domicile].................................................................................. as charterers
Name of vessel:.......................................................................................................................................
Description of vessel:..............................................................................................................................
Delivery port/­area:..................................................................................................................................
Redelivery port/­area: ..............................................................................................................................
Laydays/Cancelling date: .......................................................................................................................
Position and expected date of readiness to deliver: ...............................................................................
Duration of bareboat charter: .................................................................................................................
Trading limits permitted: ........................................................................................................................
Cargo exclusions/­permitted cargoes: .....................................................................................................
Rate of hire (per day): ............................................................................................................................
When/­how payable: ...............................................................................................................................
Bunker quantities/­prices on delivery/­redelivery: ...................................................................................
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Form of charterparty: BARECON .........................................................................................................
Commission .................... % total commission your end including ................... % address
Subjects
Subject to Charterers approval of plan/­inspection/....................................................
Reply
This is firm for reply here.................................................................. hours our time,
date.............................................................................................................................
END OFFER
Brokers/Owners/Charterers comments are.....................................................................
NOTES:
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
The firm offer in a COA charter should indicatively contain the following
information:
•
•
•
•
•
•
•
•
•
•
•
NAME OF THE CHARTERERS
CARGO QUANTITY AND DESCRIPTION OF THE COMMODITY
LOADING AND DISCHARGING PORTS AND BERTHS
LAYDAYS/CANCELING DAY (LOADING NOT TO COMMENCE BEFORE
THE FIRST DATE AND THE CHARTERERS HAVING THE OPTION TO
CANCEL THE CHARTER IF THE SHIP DOES NOT PRESENT ITSELF
BEFORE THE SECOND DATE)
LOADING AND DISCHARGING RATES AND TERMS
DEMURRAGE AND DESPATCH RATES
FREIGHT AMOUNT AND CONDITIONS FOR PAYMENT OF FREIGHT
CLAUSES GOVERNING TIME COUNTING AND COMMENCEMENT
OF LAYTIME, BUNKER CLAUSE, CLAUSES GOVERNING EXTRA
INSURANCE PREMIUMS, TAXES, DUES, ETC., WHICH THE OWNER
CONSIDERS TO BE OF PRIME IMPORTANCE
CHARTERPARTY FORM TO BE USED
TOTAL COMMISSIONS
REPLY TIME
An offer checklist at a CoA charter follows. It includes alternative wordings
that may be used when negotiating a CoA (see the terms and practice of a CoA
explained in chapter 13).
Checklist 4: Offer/Indication (Main Terms)
COA CHARTER
For reply by.............................................................................................................................................
For account of [name and domicile]..................................................................... as charterers
Type of ship and vessel particulars (specifications): .............................................................................
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Cargo quantity:........................................................................................................................................
Cargo description:...................................................................................................................................
Rate of freight:............................................... Where and how paid:......................................................
FIOS/FIOT/FIO SPOUT TRIMMED:....................................................................................................
Loading port(s)........................................... Discharging port(s):................................................
Laydays/Cancelling:...............................................................................................
Position and expected date of readiness to load:..............................................................................
Loading rate/Discharging rate or days permitted: ..................................................
Demurrage/Despatch: ............................................................................................
Dues/­taxes (for account of ): ...................................................................................
Owners/Charterers to appoint/­nominate agents both ends:....................................
Extra Insurance (for account of ): ...........................................................................
Total commission including address: .....................................................................
Form of charterparty: GENCOA etc................................................. subject to all further details
Commission
.......................... % total commission your end, including......................... % address
Subjects
Subject to......................................................................
Reply
This is firm for reply here................................. hours our time,
Date............................................................................................
END OFFER
NOTES:
Brokers/Owners/Charterers comments are................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
................................................................................................................................................................
When negotiating the main terms of a charter, the details that are typically
included in the description of vessel’s particulars may be the following:
•
•
•
•
•
•
•
•
•
•
•
vessel’s name;
year built;
flag;
classification society;
deadweight (may be given in different ways, e.g. DWCC, DWAT,
Summer Deadweight etc.);
cargo space cubic (in most cases both grain and bale cubic);
number of hatches and holds;
cargo gear;
speed;
bunker consumption (FO and DO – only applicable on time charter
engagement);
other details of importance for the intended cargo and trade.
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In practice, the vessel particulars cannot be given with great exactness and
it is customary that the description of the ship is followed by the words “ALL
DETAILS ABOUT”. The shipowner’s official description of a ship in tonnage
lists, pamphlets and their website is often concluded by the sentence “ALL
DETAILS GIVEN WITHOUT GUARANTEE BUT GIVEN IN GOOD FAITH
AND BELIEVED TO BE CORRECT” and that is exactly the meaning of the
word “ABOUT” in the particulars of the ship given when submitting the offer.
It may be emphasised that the precise legal effect of these words is not always
easy to foresee, but the individual circumstances may differ and thereby also the
legal consequences.
Every offer and counter-­offer should state the reply time, date and place for
the reply. The reply time will normally be a few hours, but in any case good
sense will ensure that there will be enough time for the broker to pass the offer
to his principal and to leave a reasonable period for it to be considered. The time
limit must be clear and unambiguous. Therefore, although the words “immediate
reply” or “prompt reply” are in common usage, it is advisable not to use such
terms because they are inexact. An offer or counter-­offer is valid only in the case
where the reply is given within the time limit.
One of the most important tasks that should be discussed between the parties is
the determination of the freight level in a charter. The factors that are taken into
serious consideration from the negotiating parties for the determination of the
fixture rate may be the following6 (see also section 2.3):
•
•
•
•
•
•
•
•
type, age and condition of the vessel;
current state of the freight market for the chartered tonnage;
expectations of the parties for the freight market;
charter period (the freight levels of voyage charters are more volatile
comparing with the freight levels of time charters);
overall cost of providing the vessel;
negotiating power of the parties;
vessel’s position;
chartering policy or marketing strategy aspects (see chapter 5).
In practice, it never happens that one party replies to a first offer by a “clean
accept ”, but instead the reply will normally be one of the following:
• “Accept your last offer, except . . .” followed by the terms it is proposed
to change. This is a counter-­offer, where the recipient is agreeing certain parts of the offer previously received and this is covered by the
word “accept”, but desires certain amendments, deletions and additions
which are listed and covered by the word “except”.
6 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 481–482).
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Chartering routines
• “Decline your last offer and offer firm as follows . . .”. This is a complete
rejection of the last offer received (possibly because it is in the wrong
format and/­or on the wrong terms), but an alternative detailed offer is
made by the offeree to the offerer.
• “Decline your last offer without counter”. The offer is declined by the recipient. Both the parties are then free to work the cargo or vessel elsewhere.
• “Repeat our last offer, except. . .” followed by the terms it is proposed to
change. This is a complete rejection of the last offer received. The last
recipient rejects the offer of the last offerer. Instead, he insists on his last
offer proposing an amendment to that.
An offer and a counter-­offer frequently have a reservation, or “subject” in
other words, which must be cleared before the chartering contract is considered
binding7 (the legal aspects of subjects are presented in section 9.7.3). The most
common types of “subjects” are the following:
• Subject Stem (=subject to enough merchandise): The charterer has to
verify that cargo is or will be available at the loading port. In other
words, the fixture is closed subject to the availability of cargo on the
date or dates on which a ship is offering to load.
• Subject Sale: The charterer has to verify that the sale of goods is fulfilled.
• Subject Details: The parties have agreed on main terms, but secondary
aspects need to be clarified, for example whether the vessel can obtain
certain necessary certificates for the specific trade. Fixture of the charter
will be finalised in a later stage when parties agree on details, i.e. on
terms and conditions which, although important, do not have a significant effect upon the financial aspects of the charter.
• Subject Survey: In the case of a time or bareboat charter, the charterer
wants to check the condition of the vessel before the fixture of the charter is finalised.
• Subject Free or Subject Open or Subject Unfixed: Term used in a shipowner’s
offer. The shipowner informs the charterer that he negotiates with other
parties too. A possible acceptance of the offer by the charterer will result in
a fixture, only if the vessel has not been fixed to another interested party.
• Subject Shippers’ or Subject Receivers’ Approval: The charterer must
check with the shipper or receiver or the cargo buyer that the vessel,
its expected arrival date and cargo size are acceptable at the receivers’
discharge terminal. Shippers’ or receivers’ approval of the ship is a condition precedent of the fixture.
• Subject to Management Approval: Many charterers keep records of vessels’ performance and may wish to check that there is nothing against
7 Collins, N. (2000) The Essential Guide to Chartering and the Dry Freight Market (London, Clarkson Research Studies, pp. 148–150); Coulson, E.C. (1995) A Guide for Tanker Brokers
(London, Clarkson Research Studies, pp. 10–11); The Baltic Exchange (2014) The Baltic Code 2014.
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Chartering routines
•
•
•
•
the vessel in their records. Fixture will be final if charterer approves the
vessel’s and shipowner’s track record.
Subject to Approval of Charterers by Owners: Many shipowners keep
records of charterers and may wish to check that there is nothing against
the company in their records.
Subject Head Charterer’s Approval: This subject will normally indicate
that the cargo in question is a relet or sublet and charterers have to get
approval of the vessel from their head charterers.
Subject Board Approval: This subject is used when the Board of Directors of either principal has to approve the final fixture, but this should
be viewed with some caution as such approval can be refused without a
specific reason being given.
Subject Charterer’s Reconfirmation: This subject is now commonplace
and can be used by charterers to hold a vessel while waiting to judge
the market direction and sometimes to see if cheaper tonnage becomes
available. This is a very onerous subject for an owner as the charterer
simply does not need to give any explanation as to why a business is
failed. It is recommended that any subject should be more specific in
nature to reflect the actual situation.
The negotiations will continue in this way by “taking and giving” offers
and counter-­offers from both sides until the parties have reached an agreement upon the main terms. This agreement on “main terms”, always “subject to
details” (and other subjects), is concluded by a “confirm”. The last reply from
the owner’s or charterer’s side can be concluded by a confirmation, such as one
stating: “CONFIRMS HEREBY THE FIXTURE SUBJECT TO DETAILS”.
Then, the party who has received a “confirmation” has to respond by making a
“reconfirmation”.
At this stage the charterers or their brokers will immediately compile a full
recapitulation of all terms and details so far agreed. This “recap” is given to
the owner or to the broker representing the owner in the negotiations and this
recap should be carefully checked and confirmed by both parties without delay.
Because the parties are working within narrow time limits, the offers and counters
are given for reply within a number of hours down to immediate reply (“THIS
IS FIRM FOR REPLY HERE XX HOURS OUR TIME TODAY/THIS IS FIRM
FOR IMMEDIATE REPLY”), and the time allowance tends to become shorter as
the parties are coming closer to a “confirm”. It is not unusual that the last round
takes place with the owners’ and charterers’ brokers in direct telephone contact
with each other, and both brokers also in direct contact with their respective principals over another line.
It must also be stressed how important it is for the parties participating in
negotiations to make careful notes and to keep all the paperwork in good
chronological order, keeping records of all notes, e-­mails and other documents
used in any way during the discussions and the firm negotiations from the very
beginning until the end. The negotiations may have been a mixture of “Accept . . .
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Chartering routines
except” and “Repeat last . . .” and may have been carried out both over telephone
and via e-­mail. In other words, it must be a prerequisite that the documentation
should clearly show what has been said and agreed. It is an advantage if at least
the first full round is fully and completely documented on e-­mail and recapitulation is practically always submitted immediately after the parties are “fixed sub
details”. A day book together with some kind of a firm offer check­list, which can
be amended as negotiations proceed, should always be used by brokers to record
important elements of negotiations and safeguard their position.
Figure 8.1 presents the normal routines for negotiations of main terms. Obviously the duration of the talks, the number of terms to be dealt with, the chain of
brokers etc., will be different from business to business.
8.1.2.2 Negotiation of details
When the main terms are settled, the negotiating parties must agree the
charterparty details. The second phase of the negotiation stage concerns the
discussion of these details. In other words, this stage is about all the additional
terms which have to be fully clarified before the charter (fixture) is considered
complete.
As a matter of principle, those conditions that are of vital importance for the
charter engagement should have already been agreed as main terms. On some
occasions the negotiations may be cut off if the parties cannot agree on one or
more of the details that are of importance. However, one should not use details
of the charterparty as an excuse to break off the negotiations if the real reason is
something else.
During the negotiations about the main terms it is sufficient to refer to a charterparty form, which can be one of the following kinds: a standard form adopted or
approved by BIMCO or another organisation (e.g. ASBA, Intertanko etc.); some
other well-­known standard form recognised by both parties or the charterers; or
the charterers’ or owners’ own standard form of charterparty. Throughout the main
terms negotiations, the reservation “subject to details” is maintained by both parties.
The discussions of the second part (phase) of the chartering negotiation stage
might be long-­lasting. This phase does not usually include offers and counter-­
offers, but the suggestions of the parties. Therefore, no time limits exist and
the parties use phrases like “CHARTERERS SUGGEST THE FOLLOWING
AMENDMENTS TO . . .”. The charterers now have to present all suggestions on
amendments, deletions and additions to the printed text. These may be numerous
due to the fact that even the most recently devised standard charterparty forms
usually undergo many deletions and additions to the printed text. Some pages of
typed additional clauses (“rider”) are often required to cover the specific intentions of the parties. If the additional clauses and amendments are numerous, the
owners will receive the AMENDMENTS TO PRINTED FORM or PROFORMA8
by fax, e-­mail or another modern way of communication. Each party is at liberty
8 A document containing all the terms and conditions of a contract between a shipowner and a
charterer but which is unsigned and therefore is not the contract itself.
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Chartering routines
to change its mind or introduce new items into the negotiations at any time until
the contract is agreed in its final form. However, the brokers and chartering staff
should try to avoid doing this as it does not give an impression of trust, competence and professionalism on the side of the party changing the terms.
When both parties have agreed on every detail, there will follow a confirmation
of the deal, stating that: “HEREBY CONFIRM/RECONFIRM THE FIXTURE”.
After the agreement of the details, all subjects have to be declared clearly and in
order by the charterers before the vessel can be considered fixed. If agreement
is reached, a recapitulation (recap) message should be exchanged between all
parties summarising the final agreement. The recap will set out in full all the
Figure 8.1 Negotiations Procedure
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Chartering routines
details of the fixture and the wording of the various clauses agreed. This “recap”
is drawn up by the charterer’s broker and given to the owner or to the broker
representing the owner in the negotiations for commentary. The recap should be
carefully checked by both parties without delay. The ship can immediately start
loading where a prompt spot position is concerned and the fact that the parties
have not yet had time to sign or even type the formal document – the original
charterparty – has no practical influence on the charter agreement at this stage,
provided that a recap has been fully agreed.
Sometimes a FIXTURE CONFIRMATION is required before, for example, a
SUBJECT regarding STEM can be lifted or RECEIVERS’ APPROVAL can be
obtained. The owners may then protect themselves during the negotiations by
requesting SUBJECT TO STEM/RECEIVERS’ APPROVAL TO BE LIFTED
WITHIN XX HOURS AFTER CONFIRMATION OF FIXTURE. Under such
conditions, the fixture is still not clean and may fall. The charterers may not succeed in calling forward the cargo for the agreed time of loading or the receivers
may refuse to approve the ship or the chartering terms. Should the party who has
introduced a subject fail to lift it within an agreed time limit, the counterpart is no
longer committed to the business.
In all cases of time limits, whether it is a question of time limits for a counter, for declaring STEM/RECEIVERS’ APPROVAL IN ORDER or for waiving
other subjects, it is possible for the parties to make a mutual agreement for a new
and extended time limit. The date of the charterparty will be the last day on which
the parties reach a clean fixture, which means the date when the last remaining
subject is lifted.
At this point of analysis, it should be mentioned that there is a fundamental
difference between British and American law on the matter of “subject details”.
Under British law, if the details can not be agreed upon, then there is no contract.
Under American law, if a party accepts the offer made “subject to details”, then
there is a binding contract and the parties are obliged to continue to work out
the details. However, there is always the doubt about what the “details” are and
what the “main terms” are. Any term which could involve a monetary gain or
loss should be comprised in the main term negotiations, e.g. crew war bonuses
etc. A general principle is that those conditions which are of vital importance for
the charter engagement should be considered as main terms. For the avoidance
of doubt, instead of “sub details”, the words “subject mutual agreement of all
outstanding charterparty terms” will be clearer. This will also help avoid any
potential problem due to differences in interpretation of English and American
law, as the parties have clearly agreed that all outstanding terms have to be agreed
before there is a fixture.
8.1.3 Follow-­up stage
During the follow-­up stage (when the fixture is finalised), the main task is the
drawing up of the charterparty. The charterer’s broker draws up the charterparty
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Chartering routines
for the owner’s broker to check. The typewritten charterparty is constituted of
the printed form appropriately amended and filled in with the additional rider
clauses attached. Any mistakes are dealt with in one of two ways. If no party
has signed the charterparty, the brokers could alter the incorrect terms to accord
with the negotiation. But, if the charterparty has already been signed by a party
(or his broker on his behalf ), the brokers should not alter anything without the
agreement of the other party. In any case, the charterer’s broker has to copy and
distribute the correct charterparty and then ensure that all the relevant documents
are duly signed.
Due to the fact that there is some delay in preparing the original signed
charterparty – especially if the principals want to sign the charterparty themselves
and not their broker on their behalf “as agents only” (see section 3.5.1) – the
owner asks his broker to prepare a working copy of the charterparty (proforma
copy) and send it directly to the master for guidance. Afterwards, the owner’s
broker should keep the charterer closely informed of the vessel’s position and
expected time of arrival at the first port of the charter.
If during the execution of the charter the parties agree to change a term in the
charterparty, an addendum will be issued, detailing the relevant change(s). The
addendum must be signed by both parties and attached to the original charterparty. The same procedure must be followed if there is more than one change
in the charterparty terms but at different times. In this case the addenda must be
numbered consecutively and dated for the day when the new terms were mutually
agreed.
Figure 8.2 depicts how a typical set of charterparty documents is structured,
as described above.
BIMCO provides commercial guidelines for the business of chartering and
recommends some classic rules of charterparty drawing up. More specifically9:
• Use proper and well-­
established contract forms for the particular
business.
• Stick to tested clauses. Hastily drafted clauses are costly
“dispute-­breeders”.
• Remember that clauses which seem unimportant while things run
smoothly can be all-­important when something goes wrong.
• Make it a habit to compare parallel clauses in different contract forms to
see their advantages/­disadvantages.
• Display prudence by asking yourself “why?” and “in whose favour?”
when alterations to printed text are proposed.
• Benefit from expertise of shipbrokers skilled in the chartering profession.
• The art of avoiding mistakes is the essence of experience.
• Combine routine with imagination. They need each other.
9 BIMCO (1992) Check Before Fixing (BIMCO Publications, p. 225).
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Chartering routines
• Be constantly aware of the difference between “just shipping papers”,
like timesheets, etc. and a bill of lading which is a document of title to
value, namely goods.
• In international shipping, mutual trust is fundamental – assist in
preserving it.
• “Fraud prevention” is not an empty phrase. Awareness of the dangers is
the keyword.
• The integrity of the partner to the contract is more important than the
attractive terms offered.
The legal aspects of charterparty construction and interpretation are discussed
in chapter 9.
Almost all charterparties, as well as many other contracts agreed in international trade, are concluded under English law (sometimes more precisely
expressed as “the Laws of England and Wales”). There may also be a specific
statement that disputes will be referred to the English courts, without which other
courts may hear cases albeit applying English law. Specific legal advice can only
come from practising lawyers.
Generally, the parties to a charterparty have freedom to contract on such
terms as they may agree during negotiations. The aim should be clarity of
expression and the avoidance of ambiguity and inconsistency of clauses. If
disputes arise, which eventually come before the court or an arbitral tribunal
for determination, the judgment or award will normally reflect the presumed
intent of the parties. The case law thus made (unwritten law in the sense
that it is not an Act made by Parliament) represents the common law which
Figure 8.2 Constructing the Charterparty Document
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Chartering routines
develops according to the changing needs of commerce.10 A term of a contract
may be11:
• a condition, the breach of which entitling an aggrieved party to elect to
be released from further performance and claim damages for any loss
suffered, or maintain the contract and sue for damages;
• a warranty, the breach of which carrying only the entitlement to sue for
damages; or,
• an innominate term. Whether the term amounts to a condition or a
warranty is a matter of construction and interpretation of the contract, depending on the intention of the parties and the whole of the
circumstances.
8.2 Special chartering routines
Tender business is negotiated somewhat differently from normal chartering routines as described above. In the terminology of chartering, there are two forms
of a tender.
In one case there are no real negotiations, but charterers, who are very often a
governmental or semi-­governmental organisation, enter the market with an order
in the normal way, but with all terms and conditions on a “take it or leave it”
basis. The order is marked “tender” or “tender business” and states the latest date
and time at which offers should be in the hands of the charterers. Respectively, a
time limit will be determined up to which the charterers should reply. The owner
who wishes to submit offers has to state his lowest freight quotation and declare
agreement to all terms and conditions stipulated by the charterers (often given in
the order by referring to a familiar official pro forma charterparty).
When the time limit for tendering is reached, the charterers will compare the
offers received and they will pick out the owner who, in addition to accepting the
terms, has also submitted the most favourable (lowest) freight quotation. This
owner will be advised that he has won the tender and thereby the fixture is concluded. The charterparty terms for a business done in this way, sometimes called
a “freight tender”, are often hard and costly as seen from the owner’s point of
view and sometimes the owner may succeed in compensating himself by quoting
somewhat higher freights than would otherwise exist in the market.
The other case of tenders concerns a “cargo tender”. In this case it is the
exporter or supplier or seller of goods who has to offer on a tender for sale and
transport of goods requested by a cargo buyer. The exporter will then act as charterer and has to include complete and fixed chartering conditions in his sales
offer. The exporter/­charterer then enters the market with an order in the usual
10 The Baltic Exchange (2014) The Baltic Code 2014.
11 Plomaritou, E. (2015) Charterparty Contract (London, Lloyd’s Maritime Academy, Module
4 of Distance Learning Course “Postgraduate Diploma in Maritime Law”); Plomaritou, E. (2014)
“A Review of Shipowner’s & Charterer’s Obligations in Various Types of Charter” Journal of Shipping & Ocean Engineering Vol. 4, Issue 11–12, pp. 307–321.
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way and, in this case, it must be mentioned in the order what type of business is
concerned. Thereafter, normal routine chartering negotiations will be carried out
with the exception that the charterer will maintain a reservation like “subject to
tender being awarded ”. If the charterer wins this tender, then the shipowner will
automatically get the charter in accordance with the terms agreed.
Offers on such a cargo tender are usually submitted by a number of different
charterers/­exporters. There is nothing preventing an owner from concluding fixtures
with more than one of the exporters since only one of them will obtain the business.
8.3 Rules of chartering negotiation: the Baltic Code of Ethics
The motto of the Baltic Exchange – “Our Word Our Bond” – captures the importance of ethics in shipping. Baltic members need to rely on each other and, in
turn, on their principals, for contracts verbally expressed and only subsequently
confirmed in writing. The terms of a contract, whether oral or written, are therefore considered sacrosanct and ethical business practice is an essential commitment of Baltic members. In addition, the Baltic Exchange have highlighted
certain matters which are worthy of close attention from their members and generally speaking from all market practitioners, having given the following guidance on required standards. These include, but are not limited to, the following
basic principles12:
• All shipping market practitioners are required to honour their contractual obligations in a timely manner.
• In the conduct of their profession, shipping market practitioners must
exercise reasonable care to avoid misrepresentation and shall be guided
by the principles of honesty and fair dealing.
• A broker must only offer or bid a ship or cargo when duly authorised
by a principal or by a broker acting on the instructions of, and with the
authority of, the principal. A broker must not purport to hold or make use of
authority where that authority is not in fact held, nor may a broker alter the
substance of any authority without the approval of the principal concerned.
• An owner or owner’s broker may only offer a vessel firm for one cargo
at a time. Similarly, a charterer or charterer’s broker may only offer a
cargo firm to one vessel at a time.
• A principal may receive multiple firm offers for a vessel or cargo but
must always make it clear at the time if he is already out firm elsewhere.
• An unsolicited offer or proposal does not necessarily establish the channel of negotiation.
• Prior to quoting business from a principal previously unknown to him, a
broker should take reasonable steps to obtain the background and reputation of the principal concerned. However, where this has not been possible, the situation should be clearly communicated to any counter-­party.
12 The Baltic Exchange (2014) The Baltic Code 2014.
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• All parties must ensure there is absolute clarity regarding the payment
of broker commissions. In the event it is anticipated that commissions
will be deducted from hire and paid to the broker by the charterer, then
this must be expressly stated in both the recap and the charterparty. Any
subsequent change must be similarly documented.
• Brokers who act as Baltic panellists are required to pay careful attention
to the instructions offered by the Baltic Guide about the specification,
production and management of benchmarks. Impeccable standards of
honesty and integrity are critical to this role.
Unacceptable practices include, but are not limited to, the following:
• It is unacceptable for brokers to offer named tonnage against tenders
without the authority of owners or disponent owners.
• Brokers must not imply that they hold a ship or cargo firm or exclusively when they do not, in order to secure a response from another
party.
• A vessel must not be held on “subjects” for the purpose of determining
market direction. Failing a vessel on “subjects” for such spurious reasons is unacceptable.
• It is never acceptable to attempt to manipulate prices in the FFA (freight
derivatives) market through the abuse of “subjects” in the physical
market.
• Except where expressly contemplated in the charterparty, the offsetting
of other claims against hire or freight payments is unacceptable.
• Where a principal operates a company (wholly, partially or separately
owned), great care must be taken in considering the company name.
Where the name is similar to that of the parent company, market participants are likely to associate the goodwill of the parent with the subsidiary
or separate company. In these circumstances, whatever the precise legal
position, it is unacceptable if the “subsidiary” fails to meet its obligations
while the parent is in a position to meet those obligations or pay appropriate damages. For this reason, it is not uncommon in charter engagements that a performance guarantee is sought from the parent company.
• It is unacceptable to withhold payment of undisputed sums, including
commission to brokers.
• It is not acceptable for a charterer to fix two vessels or more for one
cargo and then hold the vessels over a period of time on “subjects”.
• It is unacceptable to distribute route or index rates, produced by the
Baltic Exchange from its panel reporting companies, for the purpose of
pricing charters or contracts, without an appropriate commission to a
Baltic broker.
• Redelivery of a vessel from the time charterer at any time prior to the
expiration of the minimum period, unless mutually agreed in advance
with the owner, is unacceptable.
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• Failure to nominate cargoes or vessels when required under the terms of
a contract of affreightment, is unacceptable.
A member of the Baltic Exchange who fails to comply with any of the above
terms or practices of the Baltic Code may be disciplined under the Rules. The
Directors have power to censure, suspend or expel an individual member and/­or
a company from the Exchange.
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CHAPTER 9
Basic legal knowledge on charterparties
This chapter attempts to introduce the legal perspective of the charterparties.
Some of the fundamental legal principles applying to charterparties are presented in the first part, where the reader is familiarised with the contracting
parties, the applicable law and the legislation of the charter documents. Then,
dispute settlement procedures are discussed, the pros and cons of arbitration
are weighed against those of court proceedings, and relevant charterparty
clauses are commented upon. Additionally, a section is devoted to highlighting
the utmost importance to be given on the evidence of the facts and the burden of
proof when a dispute arises, while the complexity of respective legal principles
is also emphasised. Furthermore, critical rules and practices are examined in
respect to the construction and interpretation of the charterparties. This includes
various topics of interest, such as the design of a document, the importance of the
implied terms and the most common rules applying to charterparty interpretation
when wording is ambiguous. Above all, this section deals with the overwhelming
application of English common law on charterparties, its differences against US
law or other legal systems and, finally, focus is given to the legal aspects and
implications of a very common, significant and controversial feature of charter
agreements, namely the “subject” provisions.
9.1 General legal remarks
Every country has its own legal system, which differs to a greater or a lesser
extent from that of another country. In certain legal fields the differences may be
much smaller than in other fields. In parts of the commercial law, such as contracts
of sale and purchase of goods, chartering matters, charterparties and bills of lading etc., there is a higher degree of international harmonisation than there is in
many other fields of law, but the governing law is still basically national. In this
context, it is important to spell out that there are certain groups of legal systems
linked to each other. Very broadly, one may distinguish a number of legal families, such as the Anglo-­American common law system, the European continental
civil law system, or a system based on Chinese law, Indian law etc. The most
important legal families, such as those examples already mentioned, have had
great impact on the development of legal systems on national level in several
countries.
Common law is generally uncodified. This means that there is no comprehensive compilation of legal rules and statutes. While common law does rely on
some scattered statutes, which are legislative decisions, it is largely based on
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precedent, meaning the judicial decisions that have already been made in similar cases. These precedents are maintained over time through the records of the
courts. The precedents to be applied in the decision of each new case are determined by the presiding judge. Common law functions as an adversarial system
where there is a contest between two opposing parties before a judge who moderates. In contrast, civil law is codified. Countries with civil law systems have comprehensive, continuously updated legal codes that specify all matters capable of
being brought before a court, the applicable procedure and the appropriate punishment for each offence. In a civil law system, the judge’s role is to establish the
facts of the case and to apply the provisions of the applicable code. The judge’s
decision is consequently less crucial in shaping civil law than the decisions of
legislators who draft and interpret the codes.1
With regard to chartering, the two most important legal systems are the Anglo-­
American common law system which is based on case law and the European
continental civil law system which is basically codified. Nowadays, these basics
are no longer very true in practice, since there is much legislation in common law
systems and much case law in “civil law” systems.
French and German law have a maritime codification covering, inter alia,
chartering through non-­mandatory regulation. That means that the code will
prevail only if the parties have not specifically contracted on a particular point
or there is not a custom to another effect. On the other hand, in English or US
law there is no codification with respect to chartering, but case law prevails. In
essence, common law is made by judges sitting in courts applying statute and
legal precedent from previous cases. The standard charterparties used, although
differently designed, have contributed to a harmonisation of the laws of international carriage of goods by sea. Furthermore, charterparties in their vast
majority make English law applicable, thus in that respect English law itself
has had a major harmonising effect. Typically, charterparties refer to a particular
legal system which shall apply to a possible dispute arising from a charterparty
(choice of law clause), while also there will often be a reference to a particular
court or to an arbitration panel which shall consider the dispute and render judgment ( jurisdiction clause).
As to the bills of lading, the situation is very different, insofar as legislation
(to a certain extent based on one of the international cargo conventions) has been
introduced with respect both to the carrier’s liability for damage to goods carried
and to the particular characteristics of the bill of lading. Nevertheless, bills of lading very often contain also both a choice of law clause and a jurisdiction clause,
which, however, may be set aside by a court in a number of countries.
It is also important to keep in mind that the outcome of a dispute may vary
depending on the law that will apply or even on the application of the law by
a particular court or arbitration panel. Although there are several similarities
depending on the globally accepted trade practices and the adopted international
1 www.law.berkeley.edu/­library/­robbins/CommonLawCivilLawTraditions.html (accessed 15 June
2017).
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conventions, there may be considerable differences in the outcome of a charter
dispute.
9.2 Contract law principles applying to charterparties
The negotiation and contracting procedure of a charterparty was described in
chapter 8. At this point, some critical issues of general contract law nature will
be examined. The reason for this is that contracting in shipping does not substantially differ from general contract law, though there are of course specific
problems occurring in view of the particularities in the field of commercial trade.
In this perspective, it is necessary to keep in mind that there are many similarities
among most of the legal systems with respect to contract law considerations, but
English law is characterised by some specific features. Law is in many respects
national in character, but as has been discussed above, there are some inter­
national elements, such as those governed by the international cargo conventions,
the international trade practices and the internationally used standard charter contracts or transport documents which all have major importance from a chartering
view. It seems that charterparties are often subject to English law; therefore some
consideration will be given below to English contract law aspects apart from the
more general aspects applying. Even if several contract law principles are generally common in most legal systems, there are certain differences which may
have an impact on individual disputes. There are two important factors in this
context. First, when there shall be a binding contract? Second, if there is a dispute
between the parties with respect to the understanding of the contract, which principles of interpretation shall prevail and how they will be applied?
A generally accepted principle seems to be that oral agreements are binding and enforceable. A problem may then arise when the parties have different
views, to investigate whether they had made an agreement or they were just
negotiating. Some agreements must be in writing in order to be effective and
this requirement may vary from one legal system to another. However, it is not
unusual that parties specifically agree that a contract shall be binding only when
it is in written form and only when it has been signed by the parties. Though not
in all legal systems and not under all circumstances, a basis is that an oral offer
is binding upon the offeror for a certain period, unless it is expressly stated or
evident that the offer shall not be binding. How long an offer is binding depends
on the circumstances, particularly if this is expressly spelt out in the offer, for
example by stating that “this offer is binding until the closing of business on
November 25”.
In practice, it may be very hard to determine exactly when an agreement has
been concluded, since negotiations may be both lengthy and complex. Under
such circumstances, it is not always easy to determine the exact moment when
the parties have come to the final and all-­embracing agreement, unless there is
a requirement that the agreement shall only be binding when it has been signed.
A dispute may arise over various subtle matters, for example on whether a full
agreement has been concluded or whether it was just a common understanding of
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the parties (which does not amount to a legally binding agreement), or even on
whether certain points have been agreed on or have been deliberately left open,
etc. However, as it has been explained in section 8.1.2.1, it is fairly common that
some points have been left open deliberately when “subject” terms are used in
chartering negotiations. In such cases, the agreement will be considered completed when a certain condition is fulfilled, for instance the approval of board
of directors, the approval of the central bank, the details of the charter being
agreed etc.
The reason why commercial contracts are typically made in writing is explained
from the need for evidence between the parties, as well as from the administrative
need for documentation in large organisations. Since there is no legal requirement that a charter agreement has to be made in writing, an agreement will be
binding when the parties are in agreement irrespective of the form. Therefore, it
depends on what the parties have agreed, whether a binding charter comes into
force only when the charterparty has been signed or whether the charterparty is
seen only as a confirmation of a charter already agreed upon. Charter agreements
are probably very seldom oral, while bills of lading, being documents of title,
are always written. When a written contract is used, for practical purposes, the
agreement is often regarded as concluded only upon the signing of the contract.
Legally, the agreement may very well be binding at an earlier stage, which means
when the parties are deemed to be in agreement. However, in business contracts
it is often expressly stated (or at least commonly understood) that the agreement
shall be binding on the parties only upon signing. This seems to be less common
in charterparties than in other business contracts, as long as in charter agreements
a number of “subjects” may exist and shall have to be lifted before there shall be
a finally binding agreement.
Charter negotiations are mainly carried out by telephone and e-­mail. Nowadays, the telex is largely outdated in most markets and negotiations are mostly
carried out to an increasing extent over the telephone and by e-­mail or other
electronic means (e.g. teleconferences). The agreement is legally binding when
the parties have reached an agreement after negotiation. As mentioned above,
charter negotiations are often carried out step by step. The “main terms” may first
be agreed between the parties but “subject details”, which means that the parties
have agreed that minor details remain outstanding before there shall be a finally
binding agreement. Often, the negotiations are also brought up to a point where
the charter agreement will be concluded as soon as the specified “subjects” are
lifted or waived (see sections 8.1.2.2 and 9.7.3).
Normally, a “recap” (recapitulation of the terms and conditions agreed) will
be made out to be accepted by the parties at the end of the negotiations and
before the original charterparty is drafted. The accepted recap may then be the
legally binding agreement, even if the charterparty is only signed later. As also
noted above, charter agreements are almost always concluded in written form.
However, sometimes time is too short to fix the terms and conditions in a written
document or sometimes a charterparty is not signed as a result of a mistake or
because of the refusal of one of the parties, etc. Despite the failure to agree on
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Basic legal knowledge on charterparties
all terms and/­or to have a finally signed charterparty, a charter may be executed
and a voyage may still be performed. In such cases, problems of different types
may arise.
It goes without saying that a dispute arising after a voyage has been performed,
without a charter having been signed and without a recap having been properly
transmitted, may be very hard to resolve. A situation may then occur where the
parties are in disagreement as to cargo quantities, laytime, demurrage or even the
freight level. It may also be a problem to determine whether a dispute should be
referred to arbitration in accordance with an intended charterparty or whether it
should be brought before a competent court – this in itself may be a very costly
and lengthy point of dispute.
Since parties typically use a standard form of charterparty and then make
deletions, modifications and amendments (note: the actual charterparty will
often contain more rider clauses and amendments than the printed base text),
several ambiguities may appear unless the parties are very careful when m
­ aking
the amendments. Since charter negotiations are carried out under pressure of
time, a final charterparty may often be easily criticised from a formal legal
viewpoint.
If a dispute arises between the parties concerning the interpretation of the charterparty or the way in which it has been performed, the matter will be decided
either by arbitrators or by a court of law. In most cases the parties choose to settle
their disputes by arbitration rather than by court proceedings. In either case, however, certain rules and principles of law will be applied to decide the particular
matter in dispute, although it must be said that it is often difficult to predict the
result with any degree of certainty.
9.3 Contracting parties
As has been discussed, the sales contract is to a large extent the trigger for the
charter agreement, while it also has an impact on the bill of lading. The seller and
the buyer of cargo thereby play a central role in forming the contents of the charter agreement. Depending on the transport clause agreed in the contract of sale,
either the seller or the buyer of the goods will be the counter-­party of the carrier
in a bill of lading or the counter-­party of the shipowner in the charterparty, as the
case may be. Thus, either the seller or the buyer of the merchandise may usually
appear as the named charterer in the charterparty. It may be said that the seller is
often the shipper and the buyer is the consignee of the goods, however this is not
an absolute rule. Furthermore, depending on the circumstances, the carrier in a
bill of lading may be a shipowner, or a time-­chartered “owner”, or even a bareboat charterer/­disponent owner. Generally, where there is a voyage or time charterparty, the bills of lading are signed by the master on behalf of the shipowner.
In these circumstances the shipowner would be deemed the carrier who enters
into the contract of carriage with the shipper. There may be situations where the
charterer issued the bill of lading in his own name. Here, the charterer will be
regarded as the principal, hence liable on the contract of carriage. However, bills
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Basic legal knowledge on charterparties
of lading issued in the charterer’s name may contain a demise clause which seeks
to transfer contractual liability to the shipowner.2
Basically, only the person who makes an agreement is bound by it. Charterparties are usually negotiated through the assistance of brokers, working on owners’ or charterers’ account, or as plain intermediaries between them. In practice
the charterparty may often be signed by a broker as agent (“for the owner”, “for
the charterer” or “as agent only”). The owner and the charterer are naturally
bound by the measures taken by, and the signature of, their agent if these are
made within the limits of his authority. If the broker does not disclose his principal he may himself be bound by the contract. These problems have been illustrated above in section 3.5.1.
It should be added here that the concept of “agent ” has two meanings. It may
involve a practical function as well as a legal power. There are various types of
agent in the maritime sphere (such as the ship’s agent) and shipbrokers could also
be seen as one of them. Some functionaries are clothed with a certain power to
represent and bind a principal. Thus, a shipbroker is seldom authorised to sign
for and bind his principal without having obtained a particular power of attorney.
The following is an illustration of the practical problems that may arise. It
may happen that a brokerage firm or a ship agency office in London or New
York is owned by a person who is also the owner of one or several single-­ship
owning companies, often registered in Panama, Liberia, the Marshall Islands,
etc. In accordance with general legal principles, only the principal is bound by
the agreement entered into for his account by his agent. Furthermore, a company
is a legal entity and liable only for its own debts. Therefore, if the broker or
agent mentioned above signs a charterparty “as agent ” for the owner, only the
shipping company (at least as a general principle) is bound by the contract, even
if the same person owns the agency and the shipping company and is also personally rich. This is based on the principle of independence of each legal entity.
However, there are certain limitations to this principle which in some cases have
been developed in English and maybe more particularly in American law under
the heading “piercing the corporate veil ”. This means the legal effort to prove
that various companies are owned by the same person, thus liability may be
spread over the companies of the same group or their assets (e.g. ships) or even
to the person itself. Similar considerations have taken place in various legal systems, sometimes through particular legislation. Nevertheless, it must be said that
breaking the “corporate veil” remains rather difficult in most legal jurisdictions
worldwide.
9.4 Applicable law and legislation
It is sometimes difficult to decide which law should apply to a dispute, but normally the charterparty stipulates the particular law to apply, either through a
printed clause or a particularly negotiated clause added in the rider. In such case,
2 Carr, I. and Stone, P. (2014) International Trade Law (Routledge, 5th edition, p. 8).
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the agreement of the parties will normally prevail. If they have not made any
agreement on the point, there may be certain difficulties in establishing the law
applicable, but in law particular methods have been developed. The choice of
the applicable law may then depend on several individual factors: the nationality of the parties; the place where the contract has been concluded; the place of
the contractual performance; the language of the agreement, etc. This choice is
important since legal principles may vary considerably between different legal
systems. For instance, it will be extremely difficult to determine the law applicable in a case where the shipowner is Swedish, the time charterer (“time-­chartered
owner”) is Greek or French, the subsequent sub-­charterer or voyage charterer
is English, the shipper Dutch and the cargo consignee American, as in such an
example major differences would exist in the legal systems of the respective
countries. These several relationships would probably be governed by different
agreements, and different laws might be applicable under the relevant contracts.
As mentioned, a charterparty normally contains a choice of law clause and
a jurisdiction clause, explicitly referring a dispute to be decided by a specific
procedure (e.g. arbitration or legal course), in a specific country or city and in
accordance with a specific law. In ocean charterparties, disputes are commonly
referred to arbitration or legal procedure in London or New York, with English
or USA law to apply respectively. Several BIMCO documents set out a relevant
choice of applicable law for the parties (see for example Gencon ’94, part II,
clause 19 “law and arbitration” in appendix 1). In relation to the great number
of charter transactions taking place globally, very few disputes reach the point of
arbitration proceedings and even fewer are cleared in the legal courts, while most
are settled, more or less amicably, between the parties.
9.5 Court proceedings and arbitration
9.5.1 Court proceedings
When a dispute arises between the parties, which needs to be referred to court
proceedings, the first problem may thus be to find out whether the court is competent to judge. The procedural rules vary from country to country. The most
frequent pattern is that court proceedings may be channelled through three basic
layers of courts. For example, under English law a judgment at first level may be
appealed to a Court of Appeal and then to the Supreme Court (which has replaced
the House of Lords). The possibilities to appeal a judgment may vary considerably in different legal systems. Court proceedings are public and may normally
take a long time due to appeals.
The costs of a legal action may be considerable, covering certain court charges,
counsel’s fees, interest losses, losses due to inflation, costs for and in connection
with witnesses, etc. The winning party may often be awarded counsel’s fees, or
part thereof, from the losing party. In some countries the winning party may be
awarded interest (at varying rates) and possibly compensation for loss due to currency exchange rate changes, etc. In the United States the prospects of a winning
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Basic legal knowledge on charterparties
party being compensated for counsel’s fees are relatively limited. English rules
allow cost compensation to the winning party, but they are rather restrictive as
to interest awarded, since the discretion allowed to the courts is used somewhat
cautiously.
9.5.2 Arbitration
Unless the charterparty expressly states that a dispute under the agreement shall
be settled by arbitration, it will be referred to court proceedings. It is thus absolutely necessary that the parties agree on arbitration as the means of resolving
a dispute. National legal systems often contain legislation with provisions for
the appointment of arbitrators, for conducting an arbitration proceeding and for
the enforcement of an arbitration award, etc. Such legislation may also contain
rules on the possibility of appealing to a general court after an arbitration award.
A common principle seems to be that each party nominates one arbitrator, and
the nominated arbitrators in their turn jointly appoint an umpire. If the arbitrators
cannot agree on a solution, the umpire will have the casting vote. In some arbitration schemes it will be the duty of a certain body either to appoint the arbitration
panel or to appoint the umpire. A losing party may not normally appeal from the
award. In many countries an arbitration award may be appealed only on formal
and serious grounds, for example, if the arbitrators have wrongfully refused to
hear a witness, or if they have been bribed, etc.
Since England has historically had a certain importance in maritime arbitration, some words should be mentioned here concerning the particularities of the
UK arbitration system. Prior to the Arbitration Act 1979, English courts maintained their power to guide the development of the legal system and thus, even
under arbitration proceedings, one party could demand that a legal question be
referred to court procedure before the arbitration was finished (“to state a special case”). The advantage of a relatively faster proceeding was thereby lost.
This unsatisfactory situation was remedied to some extent by the Arbitration Act
1979 which now allows judicial review only in certain arbitration cases. In order
to solve other problems, a new Arbitration Act was introduced in 1996, which
seems to have served its purpose reasonably well.
BIMCO has drafted a set of standard arbitration clauses, which are usually
included in various BIMCO documents (charterparties, bills of lading etc.). Typically, one option offered is based on English law with London arbitration and one
on US law with New York arbitration. It must be noted that the full wording of
the BIMCO standard dispute resolution clause/­law and arbitration clause 1998,
contains, apart from the arbitration option, provisions stating that the parties may
agree to refer to mediation3 any disagreement or dispute arising from the charterparty. Furthermore, after the introduction of the Intermediate Claims Procedure
3 Mediation essentially involves the appointment of an individual to go between the parties and
see if they can find common ground or tease out settlement terms that would be acceptable to both
sides (www.theshippinglawblog.com, accessed 1 September 2017).
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Basic legal knowledge on charterparties
by the London Maritime Arbitrators Association (LMAA) in 2009, which was to
deal with claims amounting between USD 100,000 and 400,000, both BIMCO
and LMAA co-­operated to jointly produce a relevant additional wording to the
standard BIMCO clause.
It is worth adding that the International Chamber of Commerce has drawn
up a special procedure for the appointment of arbitrators which, however, is
rather circumstantial and not generally favoured in shipping business today. The
Comité Maritime International (CMI) has suggested an arbitration system in
which the parties choose arbitrators from a CMI list covering a number of well-­
qualified persons. This system should be completed with an agreement on the
law to be applied and the place where the arbitrators should meet. In a number of
countries there are also particular arbitration centres which have been developed
to attract dispute settlements.
9.5.3 Arbitration or litigation (legal action)?
It is not possible to state in general terms whether arbitration or court procedure is preferable. In commercial contracts arbitration is often preferred owing
to aspects of cost burden, the time aspect and secrecy. By tradition, arbitration
procedure has been regarded as quicker and less expensive than court procedure,
while the parties, for different reasons, generally prefer that the procedure is not
public. In countries where the courts have little commercial experience, the parties may also prefer to have a dispute decided by persons who, in their view, have
such knowledge and expertise.
On the other hand, the most popular arbitrators are frequently very busy and it
should be underlined that a long time may elapse before three busy arbitrators and
two busy counsellors find sufficient time available for common meetings. Certain
parties may also consider it an advantage to have a dispute decided by ordinary
courts. Another feature to take into consideration is the high fees charged by
arbitrators for which the disputing parties are responsible jointly and severally.
Arbitration awards may have another advantage due to an international convention (the so-­called New York Convention4) on the enforcement of arbitration awards, whereby arbitration awards given in one convention country are
recognised in another country which is a party to the convention. In spite of that
convention, it may nevertheless appear to be somewhat cumbersome to have
an arbitration award given in one country exercised in another one. Without the
convention such problems might, however, be difficult to overcome, because
the authorities of a country may request a new trial or at least an affirmation
of the decision before it can be enforced. Several of the largest trading nations
are parties to the New York Convention. With respect to court proceedings and
judicial judgments, there is no clearly equivalent solution as that applying to
the arbitration awards, but within the EU there are particular rules to similar
effect.
4 See www.newyorkconvention.org (accessed 15 June 2017).
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Basic legal knowledge on charterparties
It should also be mentioned that, in practice, a winning party may find that a
favourable decision will not bring him any money since there is no money had
by the counter-­party. When a party has reasons to suspect that the other party has
no money, he will try to arrest some property belonging to the latter to be used
to cover the amount to which he may be entitled. The arrest provisions differ
considerably between the various legal systems and jurisdictions, also depending
heavily on the property to be arrested.
Both New York and London are popular centres for arbitration in charterparty
disputes, but, depending on the parties involved, arbitration proceedings may
also be conducted in Moscow, Paris, Hamburg, Beijing, Singapore (see appendix
6, NYPE 2015, clause 54 “law and arbitration”) etc. It should be noted that a
dispute may be determined differently by English arbitrators than by American
arbitrators, while differences may also come up if the arbitrators are “commercial
men” rather than lawyers. Particularly where American charterers are involved,
there are charterparties stating a maximum fee for the arbitrators when the disputed amounts are limited.
It is important to bear in mind that a charterer, having in a charterparty an
arbitration clause referring a dispute to arbitration in London and according to
English law, when chartering the vessel out (thus having a charter chain or sub-­
charter or sub-­let), he should ensure that an equivalent clause is included in the
subsequent charterparty. This is to avoid, as far as possible, the situation where
arbitrators under one charterparty will come to one conclusion and arbitrators
under the other charterparty will come to another. It may also be an advantage
to refer general average proceedings and a charterparty arbitration to the same
place, governed by the same law.
Furthermore, it is quite common for the parties, instead of a traditional arbitration clause, to make a special agreement to refer a certain question of principle
or the whole dispute to BIMCO or to a qualified and neutral person, for example
a reputable law firm, a university or a fellow member of a relevant business
association.
9.6 Evidence
It does not matter how the material rules governing a relationship are designed,
if the party invoking the rules cannot convince the arbitrators or the court that his
version of the facts and his suggestions concerning the legal merits of the case
are correct. Therefore, it is of utmost importance that the party who relies on a
certain provision produces evidence of the facts supporting his view. For example, a fairly common basic legal idea seems to be that the injured party will have
to prove that he has suffered damage, recognise the “person” who has caused
this damage, justify the extent of the damage and, in many legal systems, he
may also have to prove that the counterpart has been negligent. In a contract, the
parties will normally be bound by their contractual undertakings. For instance,
under English law, that party who has promised something will be bound by his
promise irrespective of possible negligence. In some cases, the burden of proof
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will change from one party to the other. In other cases, the court or the arbitrators
may prefer to have an overall picture of the facts brought in so as to judge. Sometimes, there will be a defined presumption which a wrongdoer has to overcome
in order to avoid liability. If, for example, the question of liability for damage to
the cargo is raised under the cargo conventions (e.g. the Hague Rules or Hague-­
Visby Rules), the cargo interests will have to prove that there is a case of cargo
damage and that this damage occurred during the custody period of the carrier,
whereas it will then be on the carrier to prove that the damage was not caused by
his negligence or that of his employees or servants.
Legal principles concerning evidence and the burden of proof are highly complex. It is impossible to give a broad outline covering all possibilities, but suffice
it here to mention that these principles exist and the parties, in their contracting,
may count on or dispose of them to some extent, depending on their intentions. For
example, a certain clause may prescribe that the burden of proof shall rest with one
of the parties. Another example concerns the agreement of the parties to appoint a
common independent surveyor when a damage occurs, etc. However, for practical
purposes, it may be of considerable benefit for the parties to have a basic knowledge of the material legal rules applying, in order that they can obtain relevant
evidence according to the circumstances. In other words, when something occurs,
people may be able to get a written statement from a reliable and well-­reputed
person, find witnesses, make careful notes and observations about the facts, etc.
9.7 Construction and interpretation of charter agreements
9.7.1 Design of the charterparty
A charter relationship will normally be covered by a charterparty. The basis will
typically be a standard form of charterparty, modified and amended by riders and
addenda in accordance with the individual agreements. A charterparty must be
correct as to its material contents and should reflect precisely what the parties
have agreed. Its language should be unambiguous so that it expresses the intention of the parties. English law is known for applying more strict interpretation
rules than many other legal systems. This means that English courts/­arbitrators
will generally follow closely and apply the wording of a document. Furthermore,
it must be stressed that English law does not recognise general good faith obligations. That being said, it should be underlined that English law seems to apply
a common business sense approach in the interpretation of charter documents,
although the wording of them will always remain the basic point of deviation
from this principle.
Through time, English court decisions have had an important impact on the
meaning given to certain expressions and contractual clauses used in chartering. The effect of court decisions which change or modify a well-­established
understanding of a principle may initially cause some confusion in the market
and result in certain counter-­measures or actions being taken by critical shipping
bodies such as BIMCO or International Chamber of Shipping (ICS), or other
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organisations such as Nordisk Defence Club (known also as Nordisk5 or Nordisk
Skibsrederforening) and various P&I Clubs. New clauses and/­or wordings will
probably be introduced to meet the new limits set by court decisions or to avoid
or restrict the effects of the court decisions, adjusting the market practice accordingly. Thus, for all the practitioners involved in the chartering and shipbroking
profession, it is extremely important to follow closely new court decisions in
order to have an up-­to-­date knowledge of the meaning of certain expressions and
clauses.
When comparing charterparties, one will find that they differ considerably
with regard to their material contents as well as to their layout. Such differences
depend on varying customs, demands and practices resulting from different sectors and trades. Documents are therefore constantly revised in order to meet such
requirements. It is common that charterparties have a code name, often printed
at the top of the form. The clauses are numbered and sometimes every line of the
document is numbered as well (see for example Gencon ’94, appendix 1). In the
margin of the form there is often a heading giving a general idea of the contents
of each paragraph or clause. BIMCO seems to have widely adopted such a system with a box layout, meaning that individual particulars of the document are
entered into the boxes provided on the first page, while the general clauses are
described on a separate sheet (see Gencon ’94 in appendix 1). However, this is by
no means a generally accepted method. Tanker charterparties, all versions of the
NYPE form and many other documents do not follow this “box layout” design
(see for example Shellvoy 6 in appendix 2 and NYPE 2015 in appendix 6).
9.7.2 Offers and acceptance, written or no particular charter form
Reverting back to what has been discussed in chapter 8 about chartering negotiations, these matters will now be dealt with having a little more of a legal perspective in mind. When a shipowner is informed that a charterer needs tonnage
of a type that the owner is able to provide, he first makes calculations based on
the actual vessel and the specific requirements of the charter. If these freight
calculations seem reasonable (see analysis in chapter 14), the owner may make
an offer in accordance with the considerations described above in the chartering
negotiation procedure.
Although the agreement is binding as soon as the parties have agreed on all
terms and conditions, a charterparty is usually made out in order that the provisions shall be precisely fixed. Basically, one may say that the charterparty is
decisive to show what has been contracted between the parties unless one of
them proves that something else has been agreed. English law, more than many
other legal systems, applies the so-­called parol evidence rule. This rule basically
means that only matters which are found to be expressly dealt with in the contract will be allowed by the court/­arbitrators in the interpretation of the contract.
The supporting rationale for this rule is that since the contracting parties have
5 See www.nordisk.no (accessed 15 June 2017).
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reduced their agreement to a single and final writing, extrinsic evidence of past
agreements or terms should not be considered when interpreting that writing,
as the parties had decided to ultimately leave them out of the contract. In other
words, one may not use evidence made prior to the written contract to contradict
the writing. English courts, as well as US courts possibly to somewhat lesser
extent, are thus less inclined to allow evidence other than that found in the contract than are, for example, German or Scandinavian courts. However, it must be
emphasised that there are many instances where English courts and arbitrators
consider terms and conditions to be implied, even covering fundamental principles on the laws of the carriage of goods by sea, such as seaworthiness, no deviation from the agreed route, reasonable despatch etc. It should also be mentioned
that international commercial contracts (including contracts related to shipping
matters) often contain a so-­called “merger clause” specifically setting out that
only what is specifically in the contract will be taken into consideration. On top
of such clauses, commercial contracts will also often contain “no oral amendment clauses”, which mean that amendments shall be binding only when made
in writing.
Figure 8.1 has described schematically how the charter negotiations may be
carried out. The general contract principle is that an offer is binding, even though
English law is somewhat different on this point due to the doctrine of consideration (see below at this section). Then, a counter-­offer will be regarded as a
rejection of the original offer in conjunction with a new offer binding upon the
person who has given the counter-­offer. In order that there shall be a binding
agreement, any offer (or counter-­offer) and the respective acceptance must be
identical. Then, both parties will be bound.
An offer is not binding for any length of time. If the offer prescribes a certain
time before which it must be accepted, the expiration of this time means that
the offeror is no longer bound. If no time has been expressly stated, the basis is
that the offeree shall have reasonable or customary time at his disposal to reply.
This time is determined with regard to the importance of the business, the circumstances in which the offer has been given, the speed of the transactions in
the trade, the prompt manner of the charter, etc. In any case, the parties should
explicitly prescribe the terms and conditions in connection with the offer and
acceptance.
The basic general principles of contract law have been described above. At
this point, however, it is worth emphasising that legal handling of the details of
a charter differs considerably among various legal systems. In English law the
doctrine of consideration prevails, which means that the offeror is not bound by
his offer unless the offeree has given some value, namely consideration. Indeed,
this doctrine indicates that there is no binding contract unless consideration has
been given. English law and US law, though the latter to a lesser extent, thereby
differ from the general basic pattern that an offer is binding. It is hard today to
foresee whether an English court would really apply this doctrine of consideration to an international charter contract, but it is clear that many business transactions are made without regard being given to this doctrine. It is apparent that,
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when these principles are applied, practical problems may arise when trying to
determine if and when an agreement is binding, if a certain offer is binding, etc.
In particular, various “subjects” used during the negotiations may deteriorate the
understanding of the parties and the clarity of the agreement, thus causing additional and severe problems of interpretation.
9.7.3 “Subject” provisions
Having explained the meaning of the most important “subject” terms in section 8.1.2.1, their respective legal aspects will be examined here.
A “subject” provision in a charter agreement may give rise to various legal
problems. Apparently, a “subject to government approval ” term gives to the
parties a much narrower frame to act than an agreement made “subject to
the board’s approval ” or “subject details”. Unless the parties have agreed on
the specific reason why the board’s approval has to be obtained, any refusal
by the board to accept the contract may be invoked to avoid the binding force
of the contract.
“Subject” provisions are very common when contracting in shipping. The
“subjects” involved vary largely: “subject stem”; “subject board’s approval ”;
“subject approval of relevant authority”; “subject financing”; “subject details”
are some typical expressions. A “subject” may sometimes be regarded as a “condition precedent ”, sometimes not. To some extent, at the least, this is a question
depending on the quality of the “subject”: does it have any substance or only a
minor importance?
Naturally, the general idea of a “subject” provision is that it shall be used in
a loyal and ethical way in relation to the counter-­party. For reasons of evidence
it may be hard to establish a case of disloyalty and whether such disloyalty has
caused any damage or loss having any legal effects. If a party has conceded by
accepting a wide “subject” provision, such as “subject board’s approval ”, he has
given a wide discretion to his counter-­party to get out of a “subject deal” by
claiming that the board has not accepted the deal. It will be hard, particularly in
English law, to establish that the subject provision has been used contravening
the “good faith”. A party may possibly found a claim in damages if he can establish that the counter-­party made a “conditional” contract with him (e.g. “subject
board’s approval”) with the sole purpose of preventing him from making a contract with somebody else. Thus, under very particular circumstances, there may
be a situation where one of the parties could apply arguments based on “good
faith” abuse by the counter-­party.
Another question may be raised with regard to the “subject details” stipulation. There are some critical queries to be answered: Where do the parties stand
in the negotiation and the contracting process when they have agreed on the
“main terms” but “subject details”? Are they bound at all at this time? How does
each party perceive his commitment at this point? Could either of them use disagreement on any minor detail to correctly allege that he is not bound? In which
instances could there be a claim for damages?
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Basic legal knowledge on charterparties
The basic rules of contract law will typically apply, but regard must always be
given to the peculiar practices of shipping. In English as well as in US law – as a
general remark this should be true for most legal systems – the basic idea is that
there can be no contract until the parties have reached clear agreement on at least
all essential terms, and in English law basically on all terms.
As it has been seen, chartering negotiations are carried out in two steps: that
part where the “main terms” are covered and that where the “details” are determined. When the parties have fixed the “main terms”, they have made a fixture
“sub details”, but as mentioned, several other “subjects” may also be involved.
The practice of chartering negotiations may bring some legal problems. The basic
legal questions are: Is a “sub” a condition precedent? Is “sub details” always or
sometimes a condition precedent, when the parties have fixed the main terms? If
fixing the main terms would imply the conclusion of a contract, what happens if
the parties cannot agree on the details?
Different types of “subject” may have different implications, but the individual circumstances of the negotiations and the individual design of the “subject”
will have a decisive role on the effects. There are basically three possibilities
when “subjects” are used; either there is no binding contract at all, or there is a
contract that will not bind fully until the subject has been waived/­lifted, or there
is a contract which binds immediately but will cease to do so if the subject is not
waived/­lifted. As mentioned, in English law the term “subject to contract ” has
been held to show an intention not to be bound until a formal contract is subsequently entered into. Generally, the expression “subject to contract” seems to
indicate clearly that there is not yet any binding contract and presumably most
legal systems would come to the same conclusion in similar circumstances. In
certain circumstances damages may also be awarded in case of negotiations
taking place in bad faith.
There is a clear difference between English and US law when it comes to the
question of “subject detail provisions”, where English law will hardly ever be
inclined to allow a contract to come up if a subject set out in a particular provision has not been lifted/­waived.
In the US case A/S Custodia v Lessin International, Inc, 503 F.2d. 318 (2d Cir.
1974)6 the issue was whether there was a binding charterparty. The court held,
inter alia: “The critical issue is not whether the charterparty was signed by the
party sought to be charged, but whether there was a meeting of the minds of the
parties as to the essential terms of the agreement, even though unsigned by one
party ”.
When considering the phrase “sub details” it must not be overlooked that the
parties may to some extent themselves characterise what are “main terms” and
“details”, respectively. By agreeing on a fixture “sub details”, the parties have
actually made an agreement at least to some degree, while they may also have
initially agreed to come to terms with respect to the details. On the other hand, it
may be maintained that the parties have only come to a conclusion regarding the
6 http://­law.justia.com/­cases/­federal/­appellate-­courts (accessed 25 June 2017).
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Basic legal knowledge on charterparties
main terms and that the details remain to be agreed on. The details would then be
regarded as conditions precedent for the final agreement and the contract.
A number of US cases have determined the question. Taking into consideration
a number of such cases, the courts have found that “a binding fixture occurs when
there is an agreement on all essential (“main”) terms. The “subject details” does
not create a condition precedent . . . Thus, a party is not entitled to renege on a
main term just because pro forma details still remain open”.
Therefore, some difficult problems may arise. First of all, the borderline
between “main terms” and “details” must be determined and this is not always
a very easy task. Then, to what extent are the terms defined by custom and trade
practice? How are these terms related with ship and cargo operations in various
trades? To what degree may the parties dispose of the significance of the main
terms and details?
Undoubtedly, the parties have the absolute will and intention to determine
what is included in “main terms” and “details”. If they have explicitly characterised as a “main term” an item that would normally be referred to as a “detail”,
then this must be recognised as a “main term”. There may also be a distinction
between the understanding of “main terms” and “details” in various trades. However, it is impossible to determine with any degree of accuracy an exact overall
significance of specific “main terms” and “details” applying to every situation.
Thus, it may very well be that a certain detail may have more significance in one
trade than in another.
In addition, it goes without saying that the outcome of a case may probably be
different if English or US law is applied.
The following general principles could be extracted and summed-­
up,
although any conclusions can be made only with great caution. If the parties
have agreed on most main terms, but there are still some outstanding points, at
least a US court may find that there is already a binding contract if the outstanding items do not have major significance. However, it seems to be always in
the court’s discretion to decide whether or not an item should be characterised
as “main”.
On the other hand, an English court or arbitration panel would rather be more
cautious in allowing a contract binding force in spite of outstanding points,
unless these could be regarded as having only minor importance. In any case, the
basic understanding of the shipping industry seems to be that there is normally
no contract until all terms have been fixed, or at least the great bulk of them.
Nevertheless, the individual situation and the circumstances may undoubtedly
have a major impact on that.
It is felt that US courts in some cases have gone far in establishing that there
is a binding contract if the parties have made a fixture “sub details”. The impression one gets is that US courts may hold that the parties “fixing sub details”
have thereby declared that there is a meeting of minds between them and that
the details will not mean any change to this. However, one may ask why the
parties are then fixing “sub details”. By that, did they intend to leave to the court
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Basic legal knowledge on charterparties
or arbitration panel to fill in what they cannot themselves agree on? Some cases
seem to indicate that a particular item may very well be regarded by a US court
as a “detail” in one case and a “main term” in another one. This is certainly an
unforunate situation which may cause controversy and dispute.
9.7.4 Construction and interpretation rules for charter documents
Charterparties are the result of negotiations. It is important to keep this fact in
mind when a charterparty is constructed or interpreted. A charterparty is ordinarily based on the fixture made by brokers covering what the parties have agreed.
If it is alleged that a clause does not express the parties’ will, the oral agreement
behind it may be regarded as decisive if its content can be established. If legislation is applicable, it may give some guidance. Sometimes, the exchange of
messages during the preceding negotiations may be used to cast some light on
the meaning of a clause to which the parties dispute. Even circumstances which
have been used in previous negotiations and agreements between the parties or
otherwise may be taken into consideration in interpretation. In general, however, the written provisions in the charterparty will be given priority. Sometimes,
reference is made to the discussions during the negotiations in order that the
meaning of a certain phrase can be explained. Basically, the clauses used should
be interpreted as they are worded in the charterparty. Courts and arbitrators may
apply various principles or methods in their interpretation and, as mentioned, the
basic idea under English law has been that the court has to find the meaning of the
contract in the contract. This principle seems to be applied less rigidly nowadays
than before.
It is always necessary to bear in mind that several of the charterparty clauses
have not been individually negotiated between the parties, but were drafted collectively and were imprinted in the standard text of the charterparty. The parties
may not even have been aware of many clauses or the deeper meaning of them;
thus it is then almost impossible to trace any individual intentions.
Particularly in voyage chartering, it is typical that the freight agreements
are negotiated under great pressure of time. The parties have no time to weigh
and balance their words carefully. Separate clauses are sometimes hinged to
or stamped on the contract without regard being given to the printed wording.
New provisions are typed and brought into the printed form between the narrow lines without regard being given to their effects on the charterparty as a
whole. One interpretation principle is generally considered to be that clauses
hinged to, stamped on or added into the charterparty will apply before the printed
original text.
However, the riders are often less well phrased than the original provisions
of the form. It is not unusual that they are intended for situations other than
those actually regulated in the charterparty; therefore it may then be difficult to
give them an unambiguous meaning. Another principle that may be applied is
that imprecise and ambiguous wording will be construed against the party who
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Basic legal knowledge on charterparties
furnished the provision (contra proferentem rule). When interpreting a charterparty, it may be necessary to disregard details and try to determine the intentions
of the parties. If no intention can then be unambiguously determined, it may
be necessary to reconstrue the charterparty to give it a sensible meaning. As it
has been emphasised, “subject details” provision may cause certain difficulties,
since it is not always very clear to distinguish a “main term” from a “detail”.
One cannot always rely on a minor detail to avoid a contract. Moreover, a detail
may sometimes be construed as a main term having finally a major impact on the
contract.
As mentioned above, standard charterparties often contain a provision that a
dispute shall be decided at a certain place in accordance with the laws there governing. Several standard charterparties set out that a dispute shall be decided by
arbitrators in London, whereas others refer disputes to be settled by arbitration
in New York. The parties may agree on another solution and may also decide on
which law to apply in case a dispute arises.
As it has been also pointed out, English or US law dominates in ocean charter practice. In English or US law there is no particular legislation specifically
dealing with charterparties. If the parties disagree on the understanding of the
contract, the dispute will be decided in the light of previous court judgments.
Courts and arbitrators will then fall back on the general law of contract. The
pre-­eminence of English and US law in ocean chartering has led to a significant role and great interest being attached to English and US court and arbitration decisions. Even very old decisions may thus still have great fundamental
importance, if no later case has changed (“reversed ”) their effect. The growth
of the number of decisions has caused charterparties to become more and more
extensive, since the parties may wish to clarify certain principles or avoid the
effects of a legal dispute. Through the passage of time, additional clauses are
introduced which govern new problems arising through commercial shipping
practice.
Certain general principles may be discussed about the construction and interpretation of charterparties. English courts or arbitrators use as a basis to determine the applicable legal principles and make their decisions the following:
first, the wording of the charterparty; second, previous decisions; and third;
commercial customs. There is no common principle preventing the parties from
trying by agreement to avoid the effect of court decisions. Generally, English
courts still seem to feel more or less bound by a past decision given by a higher
court.
Even if the parties are supposed to have comprehensively regulated their relationship in the charterparty, there are circumstances which may not have been
clearly expressed but are implied, for example, reference to commercial customs
or the conduct of the parties. Such implied terms have the same effect as express
provisions and may be used by the courts to explain the intention of the parties
and determine the meaning of certain legal principles.
The construction and interpretation of a charterparty cannot be conducted
solely on the basis of the ordinary English meaning of the words which the
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parties have used in their contract. The most important rules of charterparty construction and interpretation may be summarised as follows7:
• The primary consideration in construing any contract is the intention of
the contracting parties. Thus, a charterparty must be construed in the
light of the particular undertaking with which it is concerned.
• Where there is a conflict between the printed and written parts of the
contract owing to an error or to inadvertence, the intention expressed by
the written part should, as a general rule, be preferred to that expressed
by the printed part. It is therefore unnecessary, and indeed often impossible, to give full effect to every printed clause.
• The “contra proferentem” rule usually applies, meaning that any ambiguous term of the contract is to be construed most strongly against the
party for whose benefit it is intended.
• The “ejusdem generis” rule is often applied too. According to that,
general words which are tacked on to specific words are to be construed
as referring only to things or circumstances of the same kind as those
described by the specific words. This may be understood from the case
Tillmans & Co. v SS Knutsford Ltd [1908] AC 406, where the respective charter term was stating “war, disturbance, or any other cause”.
The court decided that ice was not covered by the wording, although
the term “any other cause” was entirely generic and could cover
anything. Ice was not covered as having no connection with war or
warlike disturbances. In some cases, however, the general words are the
governing words and the specific words are subordinate. But doubt has
been expressed as to whether the ejusdem generis rule or the discussion
of it in relation to different words is really of much assistance where
the clause to be construed contains the words “such as”. The ejusdem
generis rule may be excluded by apt words in the document.
• It is not clearly settled whether the court is entitled to refer to a clause
which has been deleted from the document. It depends on the case.
• The grammatical construction should be adopted except where there is
a clear intention to the contrary.
• The whole of the document must be looked at.
• The words must be construed in their ordinary meaning. Thus, the word
“reachable” in the phrase “reachable on her arrival” means “able to be
reached”. It is not limited to a case where a failure of a vessel to reach
the place concerned is due to physical causes. But, technical words must
be given their technical meaning.
• The meaning must be limited by the context in which the words are used.
7 Giziakis, K., Papadopoulos, A. and Plomaritou, E. (2010) Chartering (Athens, Stamoulis Publications, 3rd edition, in Greek, pp. 478–480); Ivamy, H. (1989) Payne and Ivamy’s Carriage of
Goods by Sea (London, Butterworths, 13th edition, pp. 130–135); Mocatta, A., Mustill, M. and Boyd,
S. (1984) Scrutton on Charter Parties and Bills of Lading (London, Sweet & Maxwell Ltd., 19th
edition, pp. 1–22).
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Basic legal knowledge on charterparties
• The words of the document must, where possible, be construed liberally, so as to give effect to the intention of the parties.
• Where the words are capable of two ways of syntax, the reasonable
construction is to be preferred as representing the presumed intention of
the parties.
• An express term in a document overrides any implied term which is
inconsistent with it.
• The same words or phrases in a document should where possible be
given the same meaning, but this rule must always comply with the
particular context.
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CHAPTER 10
Common charterparty clauses and concepts
Before discussing in depth the typical clauses of each charter type, this chapter will focus on general questions, concepts and clauses commonly applying
to all different charter types and shipping contracts. Various topics of considerable interest are examined, such as the standard elements and the layout of a
charterparty, the identity of the contracting parties and the possibility of their
substitution in a contract, the importance of an exact vessel’s description
together with the crucial concept of vessel’s “seaworthiness”, as well as the
different meaning of a “lay/­can” term in a voyage charter comparing to a time
charter. Moreover, critical shipping, chartering and legal concepts are further
presented, together with a commentary on respective charterparty clauses. This
analysis comprises cargo liability allocation and the “paramount clause”, the
“war clauses”, terms concerning the effect of cost variations on the contractual
relationship (e.g. “hardship clauses”, “bunker clauses”, “currency clauses”,
“escalation clauses” etc.), the “doctrine of frustration” of the contract, “arbitration clauses”, time limits, “exception clauses” and the “force majeure clause”,
liens and arrests, the concept of general average and the “New Jason clause”,
the vessel collision rules and the “both-­to-­blame clause”, the “ISM clause” and
finally the most recent “piracy clause”.
10.1 Preamble of a charter contract
Written contracts often start with a preamble, in which the parties and the main
contents of the agreement are presented. For example, a preamble of a voyage charterparty can be formulated in the following way (Gencon ’94, part II,
clause 1):
“It is agreed between the party mentioned in Box 3 as Owners of the steamer or
motor-­vessel named in Box 5, of the GT/NT indicated in Box 6 and carrying about
the number of tons of deadweight cargo stated in Box 7, now in position as stated in
Box 8 and expected ready to load under this Charter Party about the date indicated
in Box 9, and the party mentioned as Charterers in Box 4 that:
The said vessel shall, as soon as her prior commitments have been completed, proceed to the loading port(s) or place(s) stated in Box 10 or so near thereto as she may
safely get and lie always afloat, and there load a full and complete cargo (if shipment of deck cargo agreed same to be at the Charterers’ risk and responsibility) as
stated in Box 12, which the Charterers bind themselves to ship, and being so loaded
the vessel shall proceed to the discharging port(s) or place(s) stated in Box 11 as
ordered on signing Bills of Lading, or so near thereto as she may safely get and lie
always afloat and there deliver the cargo”.
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Figure 10.1 Section of Gencon’s Box Layout
In a preamble of this design the various parts of the agreement are tied
up with each other. In the Gencon form and in many other modern charterparty forms often issued by BIMCO, the box layout system is used, which
means that the written agreement is divided into two main parts with cross-­
references between them. The first is the box part with all specifications for the
relevant vessel and voyage, while the second one is the text part with all the
printed clauses. A typical such example of a box layout design may be seen in
Gencon ’94, part I as presented in Figure 10.1 above. On the contrary, there are
some other, commonly used charterparties, such as the standard tanker forms
or NYPE, which do not adopt this box design, but their preamble is typically
structured with free text and blank spaces to be filled by the parties. A typical example of a tanker charterparty layout design may be seen in appendix 2
(Shellvoy 6 ).
In most cases the charterparty also has a third part, the rider, where additional,
photocopied standard clauses or typewritten, individually negotiated, clauses are
inserted. This rider is often much longer than the printed form used and in many
cases so many changes have been made in the basic standard document that one
may question whether it is still a standard form.
10.2 Parties to the contract
The charterer, the shipowner and other persons and parties involved in a charter
agreement have been mentioned above. In this section, some questions about the
identity of the parties will be discussed.
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10.2.1 Identity of the parties
Both the shipowner and the charterer should be able to form an opinion about
the other party before they are bound to the agreement. Both during and after the
charter period each party must have the opportunity to force the other party to
fulfil his obligations, if needed. Therefore, it is essential in the first place to know
the identity, the full style and contact details of the other party. It is not unusual
for the charterer to be represented by an agent and known to the other party only
by expressions, such as “Messrs NN as agents for charterers”. It is important not
to make any commitments and always to have a chance to terminate the negotiations if the other party turns out to be unacceptable owing to insolvency, bad
reputation, etc. As various kinds of notices must be given to shippers, receivers or
other entities, it is always important to know the identity and full contact details
of those persons (companies).
10.2.2 Substitution of owner or charterer
Sometimes, during a charter, the owners or the charterers wish to replace themselves with other owners or charterers respectively. For instance, it is not unusual
that the owner in a long period time charter agreement wishes to sell his vessel
and let the new owner of the vessel enter as owner into the time charterparty. It
also may happen that the charterer wishes to sub-­charter the vessel to another
charterer. There is a legal distinction between these cases, since in the first case
the original owner will no longer be a party to the contract after the transaction,
but in the second case the original charterer will still be primarily liable to the
owner. Basically, the owner can not sell the vessel during the time charter period
and let the new owner enter into his place as party to the charter unless a particular agreement has been made to such effect. The legal instrument that formalises
an arrangement to substitute one party for another in a contract is called “novation agreement ”. If the owner who is selling is solvent and reliable, a practical
solution and compromise may be that the charterer accepts the new owner as
party to the charter in combination with a guarantee from the selling owner for
the fulfilment of the obligations of the new owner. Sometimes, it may be an
advantage for the charterer to have a new, financially stronger, owner, but he may
nevertheless refuse to accept the proposal. In such a situation the shareholders of
the owner may instead choose to sell the shipowning shares to the new “owner”.
The situation might be correspondingly the same on the charterer’s side.
The charterer’s right to sub-­let (sub-­charter) the vessel is usually confirmed
in the charterparty. This can be done in the following way in a time charterparty
(Gentime, part II, clause 15(i) “sub-­letting”):
“The Charterers shall have the right to sub-­let all or part of the Vessel whilst remaining responsible to the Owners for the performance of this Charter Party”.
In other words, the agreement is that the time charterer remains responsible to
the owner although he has handed over his rights to “order and direct” the vessel
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to another time charterer. Unless it is expressly agreed in the charterparty, the
time charterer cannot transfer his obligations against the owner to another time
charterer.
10.3 Signing of the agreement
A charterparty can be signed either by the contracting parties or by someone
authorised by them, usually a shipbroker (about the identity and role of the parties, see sections 10.2 and 3.5). By whom and where the charterparty is signed
can be important in some situations, such as in the case of applicable law (see
section 9.4).
It is important to check that the final charterparty text is in accordance with the
fixture and the “recap” made at the time of the fixture. If an incorrect charterparty
is signed and sent to the other party, or if a party fails to protest when he gets
an incorrect charterparty signed by a broker, the incorrect charterparty may be
binding for the parties. The chances of rectifying afterwards are limited under
English law, unless a protest is made “within reasonable time” and provided that
the parties are in agreement about the rectification.
Under English Law, there is no requirement that a charterparty should be made
in a particular manner. As long as the parties have reached complete agreement,
a charterparty signed by or on behalf of the parties is unnecessary (i.e. not compulsory).1 The parties instead can base their relationship on a “recap” following
an e-­mail exchange, perhaps with an additional reference like “otherwise as per
Gencon form”, “otherwise as per C/P dated . . . for M/V XYZ ” or similar. Such
methods, however, easily give rise to confusion and dispute. Thus, if the parties
use to charter vessels to and from each other frequently, they should avoid doing
that only on an e-­mail exchange and a “recap” basis, but instead they should work
out with a pro forma charterparty and a fixture note form, which can be issued
for each individual fixture.
10.4 Vessel
10.4.1 Nomination, identity and substitution
Depending on the type of charter contract, the ship may have a more or less central position in the charter agreement. The basic idea in shipping has been that
it is important for the client (shipper/­charterer) to know exactly which vessel is
to be used for the carriage. It is also important for him that a particular vessel
is nominated at an early stage. This basic concept nowadays seems to be less
predominant, but it applies with varying force depending on the circumstances.
In conventional liner shipping (as well as in tramp shipping) the bill of lading
is normally of the type known as a shipped bill of lading, that is, the bill of lading
1 Kimball, J., Cooke, J., Martowski, D., Lambert, L., Taylor, A., Young, T., Ashcroft, M. and
Sturley, M. (2014) Voyage Charters (Informa Law from Routledge, 4th edition, p. 4).
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is issued when the goods have been loaded on board the vessel. Obviously, this
particular vessel then plays a central role. In modern liner business, where the
received for shipment bill of lading plays a much more dominant role, the particular vessel has less importance, but the customer trusts the carrier to perform
well, irrespective of which vessel is going to be used.
In time charter and bareboat agreements, which can both be classified as a kind
of vessel hiring agreement, the vessel is a central factor. In the voyage charter
agreement, which can be classified as a transportation agreement for a certain
cargo between certain ports, the description of the vessel itself does not have
the same central position as in the period charters. For instance, it is not unusual
that voyage charter agreements are concluded before it is known which ship will
be used. In such cases the ship in the charterparty is mentioned as “vessel to be
nominated ” or similar. The owner has in such a case an obligation to nominate a
vessel suitable for the intended cargo, ports, etc. In quantity contracts (see chapter 13) where the basic task under the contract is to move certain quantities of
goods within a certain time period, the normal procedure is that the ship is not
named in the agreement. In those cases where the vessel is not nominated at
the time of the fixture, it is advisable to agree as to when the owner shall make
his nomination. If the nomination is made too close to the loading, the shippers may have difficulties in supplying the merchandise, preparing the shipping
documents, etc.
When a named vessel is fixed for a charter, the existence of the agreement
is also dependent on the existence of the vessel. If the vessel is lost or declared
a “constructive total loss” (CTL), the charter agreement is “frustrated ”, which
means that it is terminated automatically and no longer exists. The charter agreement can be also frustrated for other reasons, for instance if the ship is delayed
for an extensively long period. The English “doctrine of frustration” is sometimes referred to by charterers or owners when they wish to cancel a charter
agreement for economic reasons (see further in section 10.8.5).
In voyage chartering, especially, it is often agreed that the vessel may be
replaced by another vessel. Sometimes, the charterparty may prescribe for example “MS Eugen or substitute”, or an alternative wording may be “MS Eugen,
owner’s option to substitute vessel of same class and similar size and position”.
It is essential to specify how far this right to substitute goes. Is there only a right
for the owner to nominate another ship, or is there also an obligation for him to
nominate another ship if the one already nominated is lost, or not available? Can
the vessel be replaced several times? Should the right to substitute cease a certain
number of days before the planned commencement of loading? Should it be possible to substitute only with certain named vessels or types of vessels or should it
be possible to substitute with any vessel that can carry the cargo?
Not only the name, but also the nationality, call sign, IMO-number, year of
build, type (e.g. motor tanker, reefer, etc.) are usually specified in the charter
agreement. The owner cannot, without the permission of the charterer, alter any
of the vessel’s essential characteristics as they have been described in the charterparty. For instance, if the owner wishes to change the nationality of the vessel
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(i.e. the flag), he has to get permission from the charterer as the nationality of the
vessel is in many cases essential to the charterer for various reasons. The vessel’s
description is of utmost importance in chartering matters and will be dealt with
separately in connection with the voyage charterparty and the time charterparty
(see chapters 11 and 12). At this point, however, it should be mentioned that oil
companies often have far-­reaching demands on the quality of the vessel in their
charterparties. This quality aspect is safeguarded by thorough vetting processes
and extensive questionnaires which have to be successfully passed by tanker
vessels, so that to get accepted by their charterers. Shellvoy 6 may be used as an
example of a vessel’s description clause which is far-­reaching (see appendix 2,
part I, clause (A) “description of vessel” ).
10.4.2 Trading limits
The hull underwriters maintain geographical trading limitations in connection
with the vessels they insure. The limits may be slightly different between various underwriters. Some trading areas are always accepted, others are always
excluded (mainly the Arctic areas) and others are accepted only between certain
dates and excluded for the remaining part of the year. The common rules about
the vessels’ trading limits are the so-­called “International Navigating Limits”
(INL) which are issued by the Institute of Chartered Underwriters in London
and on 1 November 2003 replaced the previous “Institute Warranty Limits”
(IWL).2 The INL define the geographical limits within which ships are able to
operate without incurring additional insurance premium from hull and machinery
and other relevant underwriters. Operating outside the INL, in areas which can
include significant hazards such as ice, could lead to damage to the ship and delay
necessitated by repairs.
The hull underwriters’ rules concerning accepted and excluded trading areas
are based on the average ice and weather conditions and, therefore, these rules
remain normally unchanged year after year. The restrictions drawn up in connection with war insurance for the vessel are based on the risk of damage caused by
war, hostilities, terrorism, strikes etc. As these risks vary greatly, the underwriters
often issue on a regular basis new rules and updates about restricted areas and
additional war premiums.
The ship’s trading limits are dependent on the manning and construction
of the vessel, as well as on the technical equipment on board. For instance,
it may be that a ship to be used in worldwide ocean trading must have more
officers and crew members than if the same vessel is used for coastal service
only. In some countries, or for the transition through some canals and seaways,
it is necessary for the vessels to have special technical equipment. For example, such equipment is required when passing through the Suez Canal and the
St. Lawrence Seaway.
2 Reay, J. and Rees, C. (2016) International Navigating Limits (The Standard Club Ltd, www.
standard-­club.com).
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It is noted that only the vessel’s trading limits are mentioned here. Additional
restrictions, mainly based on political relations between various countries, are
often expressly inserted into the charterparty. This will be explained further in
sections 12.3.1 and 13.2.2.
10.4.3 Seaworthiness
It is usually stated in the charterparty that the owner shall keep the vessel in a
seaworthy condition. Also, when no such clauses are inserted, the owners have an
obligation usually by law or by an implied warranty to keep the vessel in a seaworthy condition. Even if it is possible for the owners to insert a valid exception
clause concerning the liability for seaworthiness, in specific cases the clause may
not be valid. The most obvious example is perhaps when owners try to exempt
themselves from liability under the Carriage of Goods by Sea Act (COGSA) and
other laws based on the Hague/Hague-­Visby Rules or similar.
The concept of seaworthiness can be described as having three aspects:
• seaworthiness from the technical point of view;
• cargoworthiness; and
• seaworthiness for the intended voyage.
Technical seaworthiness includes the ship’s design and condition in hull and
machinery, as well as her stability. Cargoworthiness means that the vessel shall
be suitable for the intended cargo and properly cleaned, while seaworthiness for
the intended voyage means that she will be satisfactorily equipped, manned, bunkered etc. for the intended voyage.
When judging whether the vessel is seaworthy or not, the circumstances at
each stage of a voyage and in each situation must be considered (seaworthiness
by stages). A ship that is seaworthy for trading on the River Thames may not be
seaworthy for a voyage from England to New York, while further a ship that is
seaworthy during loading may not be seaworthy for the intended voyage unless
additional fuel, charts etc. are taken on board.
A special question related with seaworthiness for the intended voyage is to
what extent the vessel must be technically equipped and furnished with certificates necessary for her to be able to call at a certain port or a certain country
without risk of delay.
So far as the usual certificates and documents are concerned, the owner and the
master must keep all necessary certificates up to date, both in time and voyage
chartering. An exception may be the situation when the vessel is, for instance, on
time charter trading worldwide. If in such a case the ship’s schedule is changed
at very short notice and the vessel is destined for a port or country normally not
called at by the charterer, the owner should be entitled to some extra time to get
the necessary documents.
Concerning documents requested by persons or bodies other than national
authorities, for instance by the ITF (International Transport Workers’ Federation),
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the situation is not clear. In those cases where it is generally known that labour
unions claim a certain document or certificate, the owner, most probably, has an
obligation to keep such documents or certificates on board, but when the request
from a union or other body could hardly be expected, the situation is more difficult. Quite often, special clauses dealing with this problem may be found in the
charterparties. As regards restrictions and rules issued by authorities at very short
notice, the problem must be solved from case to case. A general trend in shipping
seems to be an increasing demand for a careful description of the ship and the
certificates to be on board or available and a more extensive liability on the shipowner as to his warranty in this respect.
A particular aspect of making the ship seaworthy, in the sense of being fit for
the reception of cargo, is the cleaning of holds. This goes for all vessel types,
but the extent of cleaning depends on the trade. As to dry cargo trades, it goes
without saying that a cargo of grain cannot follow upon certain types of cargo
without very careful cleaning of holds. Furthermore, a tanker regularly lifting
crude oil (dirty cargo) cannot carry a clean cargo without a thorough cleaning.
Tanks, pipelines and pumps must be cleaned between each voyage. Several types
of cleaning devices have been developed in tanker trades, such as the Butterworth and Gunclean systems.3
Frequently, one finds in charterparties provisions such as “cleaned to the charterer’s inspector’s satisfaction”. Such a clause can be risky, burdensome or harmful for the owner. In certain trades the cleaning has to be to the satisfaction of a
certain authority and this clause is usually less risky from the owner’s point of
view.
10.5 Lay/Can
Both in voyage charter and time charter it must be agreed when the vessel should
be ready to load at the first port or delivered to the charterer, respectively. The
owner and the master have an obligation to do their utmost to ensure that the
vessel reaches the first loading port (in voyage charter) or the place of delivery
(in period charter) at or before the day stated for the expected or estimated readiness for loading. If the owner or master intentionally or by negligence delays the
vessel and causes her to be late, the owner may be liable in damages for breach
of contract. A so-­called “lay/­can” clause is usually agreed, for instance “lay/­can
March 1–15”. The importance of notices given by the ship before arriving at the
first loading port of a voyage charter is dealt with in section 11.8.1.
10.5.1 “Lay”
“Lay” is a short form of “laytime not to commence before”. Under a voyage
charterparty, if a ship is ready at the first loading port before the agreed “layday”,
the owner cannot claim that the charterer should start to load the vessel or that
3 www.butterworth.com (accessed 1 June 2017).
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the time should commence to count. This situation will be discussed further in
section 11.7 and chapter 15.
If a vessel chartered under a time charterparty arrives at the port or place of
delivery before the agreed layday as defined by this term, the charterers have no
obligation to take delivery of her and, unless the charterers agree to an earlier
delivery, the ship has to wait without earning anything for the owners. Sometimes, the charterers wish to commence the loading of the vessel before the first
layday but without taking delivery of her, thus without paying for her. The owner
has no obligation to accept such a procedure; therefore if the charterers wish to
commence the loading before the first layday, the parties must be in clear agreement concerning the payment of hire, allocation of risks etc. during the period up
to the agreed layday.
The layday is not always exactly stated. For instance, in the preamble to the
Gencon ’94 form (see appendix 1, part II, clause 1), the expression “expected
ready to load under this Charter Party about the date indicated in Box 9” is
used. To find out the meaning of the word “about ”, the circumstances in the
relevant case must be taken into consideration. The longer the period between
the fixture and the first layday, the longer the period covered by the expression
“about”.
10.5.2 “Can”
If the vessel has not promptly arrived at the loading port of a voyage charter,
or port or place of delivery of a period charter, then on the cancelling day most
charterparties give the charterer an absolute right to cancel the charter agreement.
In other words, the ordinary cancelling clauses, as for instance in Gencon or
Baltime, are applicable when the ship has been delayed for reasons which cannot
be controlled by the owner and when the owner and the master have done their
utmost to speed up the vessel.
When it is obvious to the owner that the vessel has no chance of arriving at the
first loading port or place of delivery before the cancelling date, it is important
for him to get the charterer’s declaration whether or not he will cancel. Under
English law, the charterer is not obliged to give such a declaration unless this is
expressly stated in the charterparty.
The relevant problems and the way they can be handled are indicatively
illustrated in the following clause (Gentime, part II, clause 1(d) “period and
delivery/­cancellation”):
“Should the Vessel not be delivered by the date/­time stated in Box 10 the Charterers
shall have the option to cancel the Charter Party without prejudice to any claims
the Charterers may otherwise have on the Owners under the Charter Party. If the
Owners anticipate that, despite their exercise of due diligence, the Vessel will not be
ready for delivery by the date/­time stated in Box 10, they may notify the Charterers
in writing, stating the anticipated new date of readiness for delivery, proposing a
new cancelling date/­time and requiring the Charterers to declare whether they will
cancel or will take delivery of the Vessel. Should the Charterers elect not to cancel or
should they fail to reply within two (2) working days (as applying at the Charterers’
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place of business) of receipt of such notification, then unless otherwise agreed, the
proposed new cancelling date/­time will replace the date/­time stated in Box 10. This
provision shall operate only once and should the Vessel not be ready for delivery at
the new cancelling date/­time the Charterers shall have the option of cancelling this
Charter Party”.
The intention of this wording is not only to give the charterers the right to
cancel if the vessel is late. The clause also protects the owners by giving them
the right to fix a new cancelling day if the charterers fail to declare whether they
will cancel or not. This practice is similarly followed by the Gencon ’94 voyage charter form (see appendix 1, part II, clause 9 “cancelling clause”) which
provides that the charterers shall have to declare their option of cancelling the
charterparty “within 48 running hours after the receipt of the owners’ notice”
of a (new) delayed arrival of the vessel at the loading port. If the charterers do
not exercise their option to cancel the charter, then the seventh day after the new
readiness date of the vessel will be automatically deemed as the new cancelling
date. This is interesting to be examined in contrast with the Gencon ’76 form,
where the respective term provides that the charterers must on demand declare
their option to cancel the charter at least 48 hours before the vessel’s expected
arrival at the port of loading. This means that where the owner, a couple of weeks
before the cancelling date, knows that the ship has no chance of arriving before
the cancelling date, he has no right to demand the charterer’s declaration and, if
the charterer is not co-­operative, the owner may have to start the ballast voyage
towards the first loading port, in order to avoid a claim for breach of contract
from the charterer.
10.6 Cargo liability and “paramount clause”
Regarding the relation between shipowner and charterer under charterparties,
there are no compulsory (mandatory) rules concerning cargo liability. Some charterparties tend to relieve the owner from much of his cargo liability, whereas others have provisions more or less in line with the mandatory cargo liability regime
(see section 6.6.2). Although the parties in charterparties are thus basically free
to determine the extent of the owner’s cargo liability, it is not uncommon to find
a separate provision, a so-­called “paramount clause”, concerning the liability for
damage to or loss of the goods. A paramount clause may be drafted in different
ways; but the basic idea is that the Hague Rules or Hague-­Visby Rules or national
legislation based on these international conventions shall be applicable in case of
cargo damage/­cargo liability.
A paramount clause of a charterparty may prescribe that a standard wording
shall be inserted into all bills of lading issued under the charterparty, or the
clause shall cover only the cargo liability framework under the charterparty, or
finally the clause may apply to the charterparty on its entirety. In the latter case,
various legal problems may arise, since the Hague Rules or the similar subsequent conventions are geared to cargo liability allocation and not to chartering
business and practice.
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A paramount clause is one of the “protective clauses” that may be typically
found in various charterparties or bills of lading. Indicative wordings of the term
may be seen in appendix 2, Shellvoy 6, part II, clause 37 “clause paramount”,
as well as in appendix 6, NYPE 2015, clause 33(a) “protective clauses – general
clause paramount”.
10.7 War clauses
In time of war, revolution or other similar disturbances, the crew, the vessel and
the cargo may be exposed to certain risks. The personnel on board may be injured
or killed, while cargo and ship can be damaged or lost. Furthermore, there is a
risk of delay and extra costs, for instance extra insurance premiums for cargo
and vessel or additional wages of the crew. In order to make sure of the rights,
the obligations and the liabilities of the parties when crew, ship and cargo are
exposed to such risks, a special war clause is usually agreed in the charterparty.
War clauses can be divided into two groups; war cancellation clauses and war
risk clauses.
10.7.1 War cancellation clauses
BIMCO has published a standard war cancellation clause. Its latest edition was
issued in 2004. The intention of such a clause is normally to give both contracting parties a chance to cancel the charter agreement when the freight market has
totally changed as a result of war between certain countries, or when further trading with the vessel is prevented as a result of requisition or similar action from
the vessel’s home country. The war cancellation clauses may be typically found
in long-­term period charterparties and contracts of affreightment, but they are
to a growing extent also found in shorter time charterparties or even in voyage
charterparties. It must be noted that the latest edition of NYPE has removed such
a war cancellation provision, which instead is included in the previous NYPE ’93
(clause 32 “war cancellation”).
BIMCO standard war cancellation clause 2004 is aligned with the respective
clause found in Barecon 2001, which has the following wording (see appendix 8,
Barecon 2001, part II, clause 26( f ) “war” ):
“In the event of the outbreak of war (whether there be a declaration of war or
not): (i) between any two or more of the following countries: the United States of
America; Russia; the United Kingdom; France; and the People’s Republic of China
(ii) between any two or more of the countries stated in Box 36, both the Owners and
the Charterers shall have the right to cancel this Charter, whereupon the Charterers
shall redeliver the Vessel to the Owners in accordance with Clause 15, if the Vessel
has cargo on board after discharge thereof at destination, or if debarred under this
Clause from reaching or entering it at a near, open and safe port as directed by the
Owners, or if the Vessel has no cargo on board, at the port at which she then is or if
at sea at a near, open and safe port as directed by the Owners. In all cases hire shall
continue to be paid in accordance with Clause 11 and except as aforesaid all other
provisions of this Charter shall apply until redelivery”.
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10.7.2 War risk clauses
While the war cancellation clauses at first hand are found in long-­term period
charter agreements or contracts of affreightment, the war risk clauses should be
found in all charter agreements.
BIMCO has historically published the “Conwartime” and the “Voywar” war
risks clauses, respectively for time and voyage charterparties. Attempting to
reflect views recently expressed by the courts, changes in trading practices and
insurance matters, their last revision was completed in 2013, replacing the previous versions of 1993 and 2004. These standard clauses were updated and are
to be incorporated into all new and revised BIMCO standard charterparties and
other documents.4
A war risk clause must always have a definition of “war risk”. The following
example is from BIMCO’s clause Voywar 1993, as found in Gencon ’94 (see
appendix 1, part II, clause 17(1)(b) “war risks”):
“ʻWar Risks’ shall include any war (whether actual or threatened), act of war, civil
war, hostilities, revolution, rebellion, civil commotion, warlike operations, the laying
of mines (whether actual or reported), acts of piracy, acts of terrorists, acts of hostility or malicious damage, blockades (whether imposed against all vessels or imposed
selectively against vessels of certain flags or ownership, or against certain cargoes
or crews or otherwise howsoever), by any person, body, terrorist or political group,
or the Government of any state whatsoever, which, in the reasonable judgement of
the Master and/­or the Owners, may be dangerous or are likely to be or to become
dangerous to the Vessel, her cargo, crew or other persons on board the Vessel ”.
In the latest version of the clause, Voywar 2013, war risks include not only
the actual or threatened war and warlike operations, but also the “reported”
ones. Besides, piracy now includes “violent robbery and/­or capture/­seizure” to
ensure consistency with the BIMCO piracy clause. Attacks of this type often
occur nowadays and, while not technically regarded as piracy under international
law, they are treated as such for insurance purposes.5
In many war risk clauses the definition is narrower. For instance, the war risk
clause may be applicable only when the port is “declared blockaded by reason of
war” or similar. Sometimes, the war risk clauses may also state that the decision
as to whether a war risk exists or not lies exclusively with the owner.
The purpose of a war risk clause is to establish the respective parties’ rights
and obligations when crew, vessel and cargo are exposed to a war risk. Critical
questions to be addressed are: Can the owner only, or both the charterer and the
owner, cancel the charter agreement without compensation or is it an obligation
on the charterer to arrange other cargo or to pay deadfreight (see glossary)? Is the
owner obliged to go to another port or another area where the war risk does not
exist? Who will pay for delay when the loading, the sea voyage or the discharging
4 BIMCO War Risks Clause for Voyage Chartering (VOYWAR 2013), Explanatory Notes (www.
bimco.org, accessed 14 April 2017).
5 BIMCO War Risks Clause for Time Chartering (CONWARTIME 2013), Explanatory Notes
(www.bimco.org, accessed 14 April 2017).
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is hindered and who will pay for the extra insurance and extra wages for the
crew?
Sometimes, the hull and war risk underwriters or the authorities (e.g. flag, classification society, port, etc.) give instructions to the ship that certain areas, owing
to war risks, must be avoided. A war risk clause must state clearly that the owners
are entitled to follow such instructions.
10.7.3 War risk clauses in voyage charters and time charters
Typically, the standard charterparty forms have a printed war risk clause. In time
charters, various editions of the BIMCO Conwartime clause are often used (see
appendix 6, NYPE 2015, clause 34 “BIMCO war risks clause Conwartime 2013”
or appendix 4, Gentime, part II, clause 21 “war risks (Conwartime 1993)”). In
voyage charters, respective editions of the BIMCO Voywar clause are included
in the charter documents. As both the clauses are lengthy, for their full text the
reader may refer to BIMCO. Comparing the concept and application of the
clauses, it is important to know that in Conwartime a war risk may exist before or
after a charterparty has been concluded, whereas Voywar focuses on the position
before loading or after the voyage has commenced.6
Other war risk clauses, apart from those published by BIMCO, can also be
used in chartering negotiations. These clauses may not be sufficient to cover the
needs of a modern charter agreement, thus leading to disputes. Such controversial or outdated clauses should be avoided, in particular as far as period charterparties (time or bareboat charters) are concerned.
A ship operator should align war risk clauses designed for voyage chartering with those designed for time chartering. For example, when acting as “time
chartered owner”, “disponent owner” or similar, he must be careful to include
in the charter-out a war risk clause that is no less favourable to him than the
one included in his charter-in. If Conwartime 1993 is used when chartering-in
a vessel on a time charter basis, Voywar 1993 should be used if the ship is
chartered-out on a spot basis. If Conwartime 2013 is used for a time chartered
vessel, Voywar 2013 shall be used for voyage agreements of the same vessel.
Additionaly, the bill of lading war clauses must be drafted accordingly to give
sufficient protection, equivalent to that of the respective charterparty.
10.8 Effect of cost variations on the contractual relationship
The basic idea here is that the parties are bound by their charter agreement, irrespective of any later economic developments. This idea is sometimes stressed by
a so-­called “come hell or high water clause”, whereby the parties agree that they
will be bound by their contractual rights and obligations, whatever the future
circumstances. Should there be an unforeseen cost increase, this will normally
6 BIMCO War Risks Clause for Voyage Chartering (VOYWAR 2013), Explanatory Notes (www.
bimco.org, accessed 14 April 2017).
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not affect the obligations of the party having to pay unless that amounts to “frustration” of the contract (see section 10.8.5), which is not often the case. Thus,
the parties will have to regulate contractually the respective questions if they
want the economic development to have any effect on their rights and duties. In
such cases, specific clauses are sometimes found, particularly in charter contracts
covering a long period of time. They may be described or titled as “hardship
clauses”, “bunker clauses”, “currency clauses”, “escalation clauses” etc. Their
aim and construction vary widely.
A “hardship clause” may aim at the renegotiation of the contract if the economic conditions change substantially, and if the parties cannot agree during
renegotiation, the suffering party may then be forced to cancel the agreement.
Such clauses may be drafted in many different ways. Depending on the drafting,
they may or may not give the intended protection. “Bunker clauses” may be of a
type whereby the owner will be compensated when bunker prices are increased
or where he is relieved from his obligations in case of bunker shortage. “Currency clauses” and “escalation clauses” are generally designed as “compensation
clauses” only.
When the charter agreement covers a long period (particularly a bareboat, time
chartering, a contract of affreightment or consecutive voyages), the parties must
also consider the risks arising from changed economic conditions, especially rising costs and variations in the currency exchange rates. It is often hard to draft
a currency clause, an escalation clause or a bunker cost clause, which will cover
all occurrences. Therefore, such clauses may in some cases appear to have an
adverse effect to what was intended. It may be advisable to consult both financial
experts and lawyers when it comes to the drafting of such a clause. Standard
clauses drafted by BIMCO may be used as a base, but as in every case when a
standard clause is used, the circumstances in connection with the specific agreement should be taken into consideration. A few relevant examples will be given
below to explain the situation and the difficulties.
10.8.1 Currency clauses
The following examples explain the problems that may arise due to variations in
the relative currency exchange rate.
A shipowner who has all his costs in pounds sterling estimates the costs for a
certain voyage at GBP 24,500. The freight is fixed at USD 25,000 which, with an
exchange rate at USD 1 = GBP 1, gives an equivalent income of GBP 25,000 when
translated at home currency. The surplus is consequently calculated at GBP 500. If,
before the payment of the freight, the currency rate is changed at USD 1.20 = GBP 1
(a 20% weakening of the US Dollar), the owner’s compensation translated at home
currency will be limited to about GBP 20,800, which means that instead of a surplus of GBP 500 he will have a deficit of about GBP 3,700. If there was a currency
clause in the charterparty stating that the freight should be based on an agreed
exchange rate of USD/GBP = 1 and that possible changes in this rate would be
adjusted accordingly, the owner would have been entitled to a freight payment of
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USD 30,000 [i.e. USD 25,000 × (1+20%)]. In such a way, the surplus, when translated at home currency, would have been unchanged at GBP 500 [i.e. (USD 30,000
÷ 1.20) – GBP 24,500], being again sufficient to cover costs.
When drafting such a clause several problems have to be considered. First, the
parties have to decide whether a currency clause shall be inserted or not. If they
so decide, they have to draft the clause. This is not always easy. The parties have
to decide on various matters, such as whether the clause should work two ways or
it will protect only one of them, whether the rate variations have to reach a certain
level before the clause is applied, etc.
In liner business the pricing mechanisms are often based on a certain
Currency Adjustment Factor (CAF ). This is a fee placed on top of standard
freighting charges for liner carrier companies. The charge was developed to
account for constantly changing exchange rates between the US Dollar and other
currencies. Thus, its goal is to offset any losses arising from constantly fluctuating exchange rates for carriers. Calculation basis and methodology might vary
from company to company. As a rule of thumb, the CAF increases as the US
Dollar decreases in most circumstances. The surcharge is applied as a percentage
on top of the base exchange rate agreed. Due to this added, unpredictable charge,
shippers tend to prefer entering into “all inclusive” contracts at one price, that
account for all applicable charges, so as to limit the CAF effect.
The following example of a parity clause is a typical one giving a two-­way
protection:
“The freight and the demurrage rate in this charterparty is based on a rate of
exchange where USD 1 is equal to EUR . . . (the contractual rate of exchange). If at
the date of actual payment, the fixing rate for US Dollars quoted by . . . Bank, differs
from the contractual rate of exchange, the US Dollar shall be adjusted to realise the
same amount of EUR as if the contractual rate of exchange was used ”.
10.8.2 Escalation clauses
The object of an escalation clause is to protect the party suffering from cost increases,
or rather to compensate him wholly or partly for his cost increases. The idea may
then be that the freight shall continuously, or at certain intervals, be adjusted in
accordance with the cost changes. The costs of particular importance in this perspective are those for manning, maintenance & repair and insurance of the vessel.
The basic problem with escalation clauses is to find a base or a formula for
the recalculation of the freight. Sometimes, a particular cost factor will be used,
sometimes an index (of one kind or another) will be applied and in other cases
the actual cost changes will be used. Thus, if for instance the owner’s costs have
increased by 11% over a certain period, he may be entitled to a respective 11%
freight increase when an escalation clause provides for an equal adjustment of
freight to the increase of costs. However, such clauses may be thought to minimise the owner’s cost management incentive. Another way is that the parties
agree beforehand that the freight will be increased by an agreed percentage at
certain intervals or dates.
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An example of an escalation clause applying to a period charter is the following:
“The rate of hire agreed in this charter is based upon the level of owners’ monthly
operating expenses ruling at the date of this charter as shown in the statement
for future comparison attached hereto, including provisions, stores, master’s and
crew’s wages, war bonus and other remuneration, maintenance and usual insurance
premiums.
By the end of every year of the charter period the average monthly expenses for the
preceding year shall be compared with the basic statement attached hereto. Any
difference exceeding 5 per cent, to be multiplied by 12 and regulated in relation with
the next hire payment. The same principle to apply pro rata at the termination of the
charter for any part of a year”.
10.8.3 Bunkers clauses
Currency clauses and escalation clauses are used mainly in agreements covering
a long period of time. However, it may be advisable to insert into short-­term charter agreements other clauses covering cost element fluctuations which may vary
rapidly, particularly where neither of the parties may affect the cost. A typical example concerns bunkers’ cost element. If bunker prices increase considerably during
the period between the fixture of a spot charter and the commencement of the
voyage, the owner’s calculation may turn out to be totally wrong. A particular
bunker clause may be entered in the charterparty specifying that the freight payable
is based on a bunker price at USD X per ton and that any change in the bunker prices
shall entitle the owner to a corresponding freight compensation or adjustment.
Liner shipping pricing schemes are normally including a Bunker Adjustment
Factor (BAF ). This is a floating part of the sea freight charge, which represents
additions to the freight paid, arising from changes to oil prices. In the past, BAF
charges were collectively determined by liner conferences to be applicable for
a certain period on a certain trade route. As from October 2008, the European
Commission has banned carrier conferences, following anti-­trust policies, thus
shipping lines now set their own independent BAF rates which are closely monitored by the EU to ensure that no collusion occurs in price setting.
10.8.4 Other clauses dealing with cost allocation
Certain other costs which are unknown or difficult to estimate beforehand may be
dealt with in special clauses.
For instance, the following clause concerns insurance charges and is often
found in voyage charterparties:
“Any additional insurance on vessel and/­or cargo levied by reason of the vessel’s
age, flag, ownership, management, class or condition to be for owner’s account ”.
Another example concerns freight tax payment, which may burden the charterers or the owners, according to the agreement. The wording may be as follows:
“Freight tax, if any, to be for Charterers’ (or Owners’) account ”.
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Many countries levy freight taxes. In other words, taxes are imposed on income
generated from carriage of goods by sea, usually on export cargoes. In some
cases, time charter and bareboat hire is also considered to be taxable income.
Shipowners and ship managers can be affected, especially those who are not
resident in those countries levying the tax. This may be of crucial importance
for shipping groups listed in the US stock exchanges. Sometimes, the agency
fees contain a component that turns out to be a freight tax, but the owner had
little or no warning of such taxes before fixing the ship. BIMCO’s role has been
critical on this subject, as it used to issue an annually revised booklet, called
“Freight Taxes”, which provided valuable information about taxes exercised in
various countries, while this service is currently provided on-­line to BIMCO
members. Shipowners can improve the accuracy of their voyage estimations by
using this service, as it contains concise and up-­to-­date information on countries
that impose taxation on foreign ships using their ports.
A number of clauses are used to allocate freight taxes between the contracting
parties. For time charterparties, the following provision is typical7:
“All taxes and dues on the Vessel and/­or cargo and on charter hire and freight arising out of cargoes carried or ports visited under this Charterparty shall be for the
Charterer’s account ”.
For voyage charterparties, the following wording is indicative:
“Dues and other charges levied against the Vessel shall be paid by the Owners,
and dues and other charges levied against the cargo shall be paid by Charterers.
Without prejudice to the foregoing, . . . the Vessel will be free of any wharfage,
dock dues, quay dues, . . . or other taxes, assessment or charges calculated on the
basis of the quantity of the cargo loaded or discharged and free also of . . . taxes
on freight and any unusual taxes, assessment or government charges in force at the
date of this Charterparty or becoming effective prior to its completion, either on
the Vessel or on the freight, or whether or not measured by the quantity or volume
of the cargo”.
The general principles for allocation of costs between charterers and owners will
be explained in more detail in chapters 11–13, where types of charter are analysed in depth.
10.8.5 Frustration of charter contract
As mentioned in section 10.4.1, the English “doctrine of frustration” may sometimes be invoked by charterers or owners when they wish to cancel a charter
agreement for economic reasons. All the difficult questions in connection with
the doctrine cannot be explained at this point. However, it should be noted that
it is usually very difficult to judge in advance whether the court or the arbitrators
will consider an agreement frustrated or not. One should therefore be careful and
7 www.shipinspection.eu (accessed 15 April 2017).
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always take legal advice before informing the counter-­party that the agreement is
considered to be terminated on the grounds of the “doctrine of frustration”.
10.9 Arbitration clauses
Questions about the choice of law, the arbitration procedure or the legal action
have to some extent been discussed in chapter 9. To avoid disputes about which
law is applicable to the charter agreement, all charterparty forms should contain
a clause dealing with the law applicable to and the procedure for the handling of
disputes between the parties. The charterparties usually have reference to arbitration, while bills of lading more often refer to court procedures. An arbitration
clause should not only have a reference to the applicable law, but also rules about
the procedure when arbitrators are to be nominated. When English law is applicable, the arbitration clause sometimes has a reference to an Arbitration Act which
deals with the procedure; specific reference should be made to the Arbitration
Acts of 1950, 1979 or 1996.8
Modern charter contracts often contain a “split” arbitration clause where the
parties choose whether an arbitration shall be referred to London, New York or
any other place (see for example appendix 4, Gentime, part II, clause 22 “law
and arbitration” or appendix 6, NYPE 2015, clause 54 “law and arbitration”).
These clauses normally state that the contract shall be governed and construed in
accordance with the law of the place chosen for arbitration. It may happen that
the parties, who according to the arbitration clause shall choose the place for
arbitration, fail to agree to that. The charterparties therefore may provide for a
“default solution”, like in Gentime, part II, clause 22(d) “law and arbitration”.
Finally, it is common for the arbitration clauses to make special reference to
“small amounts disputes”.
10.10 Time limits
Most countries have general time limits for claims and usually the charterparties
also have such limitations. The one-­year limit in connection with cargo claims
under the bill of lading conventions is one example already mentioned. As
regards time limitations in charterparties, a general recommendation is to avoid
limits shorter than a year.
The time limits under the general contract law differ from country to country and both parties in the charter agreement must find out what limitations for
bringing suit are applicable in the relevant case. Under English Law, the key
limitation period for the purposes of commercial litigation or arbitration is six
years for actions arising out of charterparties. Other countries have shorter limits,
for example France has a one-year limit and Spain has a six-month limit. It must
also be noted that, even if the charter agreement is governed by English law and
accordingly the limitation is six years, the laws and the rules of the country where
8 www.legislation.gov.uk/­ukpga/1996/23/­contents (accessed 15 April 2017).
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the defendant has his place of business may be relevant. For example, if the
charterers are Spanish, the owners must be aware of the Spanish six-month limit
and not rely on the English six-year limit which is applicable to the charterparty
if that is governed by English law. It is also important to find out from what day
or from what event the time limit should count. Sometimes, time in this respect
starts to run from the time of final discharge of cargo, whereas sometimes it starts
to run from different points of time or certain facts.
10.11 Exception clauses
Charterparties usually contain clauses which exempt the owners or both
owners and charterers from liabilities. These clauses are sometimes related only
to specified loss or damage (e.g. loss or damage to cargo), but sometimes they
are of a more general nature. The bill of lading conventions exempt in some
cases owners from loss or damage to cargo, as it has already been discussed in
section 6.6. Another example is the cesser clause, where in a voyage charterparty the charterer’s liability ceases on shipment of the cargo. In such a case, the
charterer intends to transfer to a shipper his right to have goods carried.
The clause is usually related with the shipowner’s right to have a lien over the
shipper’s goods for the freight, deadfreight and demurrage payable under the
charterparty. Thus, the charterer is only released from liabilities that have been
replaced by a lien given to the shipowner.
The following two examples concern exception clauses of a general nature
(the first is about a voyage charterparty, while the second one is for a time
charterparty):
Gencon ’94, part II, clause 2 “owners’ responsibility clause”
“The Owners are to be responsible for loss of or damage to the goods or for delay in
delivery of the goods only in case the loss, damage or delay has been caused by personal want of due diligence on the part of the Owners or their Manager to make the
vessel in all respects seaworthy and to secure that she is properly manned, equipped
and supplied or by the personal act or default of the Owners or their Manager.
And the Owners are not responsible for loss, damage or delay arising from any other
cause whatsoever, even from the neglect or default of the Master or crew or some
other person employed by the Owners on board or ashore for whose acts they would,
but for this Clause, be responsible, or from unseaworthiness of the Vessel on loading
or commencement of the voyage or at any time whatsoever”.
Baltime 1939, edition 2001, part II, clause 12 “responsibility and exemption”
“The Owners only shall be responsible for delay in delivery of the Vessel or for
delay during the currency of the Charter and for loss or damage to goods onboard,
if such delay or loss has been caused by want of due diligence on the part of the
Owners or their Manager in making the Vessel seaworthy and fitted for the voyage
or any other personal act or omission or default of the Owners or their Manager.
The Owners shall not be responsible in any other case nor for damage or delay
whatsoever and howsoever caused even if caused by the neglect or default of their
servants. The Owners shall not be liable for loss or damage arising or resulting from
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strikes, lock-­outs or stoppage or restraint of labour (including the Master, Officers
or Crew) whether partial or general. The Charterers shall be responsible for loss
or damage caused to the Vessel or to the Owners by goods being loaded contrary to
the terms of the Charter or by improper or careless bunkering or loading, stowing
or discharging of goods or any other improper or negligent act on their part or that
of their servants”.
Both the Gencon and the Baltime clauses seem to be very favourable to the
owner. It should be noted, however, that courts and arbitrators are restrictive in
their interpretation of such clauses and the owner cannot therefore rely fully on
similar text.
Another kind of exception clause may be the “force majeure” wording which
refers to mutual relief of the parties, as follows:
“Charterers and Owners exempt each other from responsibility for non-­performance
of this agreement when same is caused by Acts of God, Governmental, Institutional
Restrictions or any other cause beyond control of either party”.
This clause can be referred to both by charterers and owners, which is not the
case with the above-­cited Gencon and Baltime clauses.
Sometimes, a “limitation of liability” provision may be agreed and drafted as
per below (Gencon ’76, part II, clause 12 “indemnity”):
“Indemnity for non-­performance of this Charterparty, proved damages, not exceeding estimated amount of freight ”.
It should be pointed out that this clause is not included in Gencon ’94.
As indicated, many different kinds of exception clauses are found in the charterparties and it is often difficult to find out to what extent they are applicable to
a relevant situation. The main problem with the exception clauses is that they
are very often disregarded during the negotiations. The printed clauses in standard forms easily “slip in” more or less unnoticed by the parties. The probable
explanation is that they are not often referred to by the parties and therefore are
considered to be harmless. This is not at all correct. The existence and wording
of an exception clause may be decisive and, particularly when large amounts of
money are involved in a dispute, the parties refer to the exception clause to try
to win the case. The parties are recommended to read carefully all the exception
clauses and consider their contents before accepting them. This is, of course, a
general recommendation applying also to all other clauses in the charterparty.
10.12 Maritime liens
A shipowner may exercise a lien on goods carried on board the vessel for charges
like freight, deadfreight, demurrage, expenses for the cargo, general average contribution, etc. Liens on goods can be based on the applicable general law, on
express agreement in the charterparty or bill of lading, or on both the general law
and express agreement. On the contrary, sometimes a claim against the owner
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will be connected with a lien on the vessel. Such a lien may remain on the ship
even if that is sold to another shipowner. In time and bareboat chartering, owners,
by agreement, often have a right for lien on the freight due to the charterers under
any underlying bill of lading or sub-­charterparty. In order to find out the chances
of exercising a lien in a relevant situation, not only the contracts (charterparty and
bill of lading), but also the applicable laws (the law of the contract and the law in
the relevant country where the lien will be exercised), must be considered. Liens
are further discussed in various sections throughout the book (see index under
the word “lien”).
10.13 Arrest of vessels
Persons or companies who have claims against a shipowner sometimes may
proceed in arresting one of the shipowner’s vessels in order to get payment or
security for payment. The rules applying to an arrest of a vessel vary considerably, depending mostly on the applicable law, namely the legal jurisdiction in the
country where the arrestor intends to arrest the vessel. It is therefore essential
both for the arrestor and the shipowner to appoint a local lawyer able to provide
legal advice, evaluate the circumstances of the case and handle the formalities.
As an example of the variations between different countries, a ship in some
countries can be arrested only for claims secured by a maritime lien or a mortgage on the vessel, whereas in other countries the ship can be arrested for any
type of monetary claim irrespective of being secured or not. Sometimes the arrestor must produce evidence and security for his claim and in other cases a vessel
can be arrested on very loose grounds and without security. Considering this, it
goes without saying that detailed recommendations cannot be given to the parties
in this respect. Generally speaking, it is recommended that a shipowner should
act immediately when there is a risk of arrest. He should consult his legal advisors, the P&I Club, his bankers, etc., preparing defences, arguments and securities to avoid delay to the vessel. The person or company who intends to arrest a
vessel should also note that, even if it is sometimes very easy to do so and thereby
get security, they risk receiving a counter-­claim for the delay of the vessel if the
arrest is proved to have been made without justification.
10.14 General average
The definition of general average is contained in section 66(2) of the UK Marine
Insurance Act 1906 as follows9:
“There is a general average act, where any extraordinary sacrifice or expenditure
is voluntarily and reasonably made or incurred in time of peril for the purpose of
preserving the property imperilled in the common adventure”.
9 Hudson, N.G. and Harvey, M.D. (2010) The York-­Antwerp Rules: The Principles and Practice
of General Average Adjustment (Informa Law from Routledge, 3rd edition, p. 31).
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Therefore, there is a general average act when, and only when, any extraordinary sacrifice or expenditure is intentionally or reasonably made or incurred
for the common safety and for the purpose of preserving from peril the properties involved in a common maritime adventure. An inherent element of the
general average is that sacrifices and expenditures are proportionally borne
and shared by the different contributing interests of the maritime adventure.
The subject matter of general average includes all the interests of the common
adventure which are at risk. Such interests are physical, namely the ship, the
cargo, the bunkers, stores, personal effects; but, there are also those interests which are dependent on the safety of the physical property, such as the
freight, time charter hire (which are earned upon the safe carriage of the cargo)
and any other property involved which is at risk during a maritime common
adventure.10
A typical, but rather old-­fashioned, example of general average concerns the
situation where a deck cargo is jettisoned in order to balance a listing vessel and
thereby save her, her other cargo and freight. Another up-­to-­date example is when
a vessel in distress is saved.
Nearly all general averages are adjusted in accordance with the so-­called
“York-­Antwerp Rules (YAR)”. This is a set of rules which outlines the international framework of general average settlements. The rules were first established
in 1890 and have been amended several times since then. The last revisions are
those of 1994, 2004 and the most recent of 2016. It is common that charterparties,
contracts of affreightment, bills of lading, waybills and marine insurance policies
have a reference to one version of these rules. Under the rules, a danger must be
imminent, there must be a voluntary jettison of a portion of the ship’s cargo in
order to save the whole and the attempt to avoid the danger must be successful.
If these conditions are true, then all parties involved in the maritime adventure
must share proportionately the financial burden of the losses incurred to the owner(s) of any cargo that was jettisoned to save the vessel, the cargo and the other
property.11 Before the cargo is discharged from a vessel when general average
is declared, the cargo owners, other interests or their underwriters usually have
to give “bonds”, which guarantee their contribution to the forthcoming general
average adjustment.
YAR 2016 was approved by CMI (Comité Maritime International)12 in
May 2016, after a long drafting process which began in 2012. All industry partners such as BIMCO (representing shipowners), ICS (International Chamber of
Shipping) and IUMI (International Union of Marine Insurance) have agreed to
support the 2016 revision. These rules have a good prospect of being widely
adopted in place of the York-­Antwerp Rules 1994, the set of rules which is at
present most commonly incorporated by reference into charterparties and bills of
lading. Thus, the York-­Antwerp Rules 2016 are expected to fill the gap created
10 www.lloydslistintelligence.com (accessed 17 April 2017).
11 www.investopedia.com (accessed 17 April 2017).
12 Both the YAR 2016 and the respective CMI Guidelines may be found at www.comitemaritime.org.
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by the failure of the 2004 Rules which, whilst promoted by cargo interests, never
found acceptance in the shipowning community as they were less favourable for
the owners.13
The complicated questions which arise in connection with a general average situation extend beyond the scope of this book. However, attention must
be drawn to the “Jason Clause” or “New Jason Clause” or “Amended Jason
Clause”, which are alternatives often found in the charterparties or other contracts of carriage. This clause was initially drafted to avoid the consequences of
a court case in the United States which held that a shipowner could not recover
the cargo’s proportion of general average arising out of negligent navigation or
errors in ship management. Nevertheless, it is doubtful to what extent a Jason
clause or similar is valid.
The “BIMCO New Jason clause” has the following wording14:
“In the event of accident, danger, damage or disaster before or after the commencement of the voyage, resulting from any cause whatsoever, whether due to
negligence or not, for which, or for the consequence of which, the Carrier is not
responsible, by statute, contract or otherwise, the goods, Shippers, Consignees or
owners of the goods shall contribute with the Carrier in general average to the
payment of any sacrifices, losses or expenses of a general average nature that may
be made or incurred and shall pay salvage and special charges incurred in respect
of the goods.
If a salving ship is owned or operated by the Carrier, salvage shall be paid for as
fully as if the said salving ship or ships belonged to strangers. Such deposit as the
Carrier or his agents may deem sufficient to cover the estimated contribution of the
goods and any salvage and special charges thereon shall, if required, be made by
the goods, Shippers, Consignees or owners of the goods to the Carrier before delivery”.
A general average clause is one of the “protective clauses” typically found in
a dry cargo voyage charterparty (see appendix 1, Gencon ’94, part II, clause 12
“general average and new Jason clause”), in a tanker voyage charterparty (see
appendix 2, Shellvoy 6, part II, clause 36 “general average/­new Jason clause”),
as well as in a time charterparty (see appendix 6, NYPE 2015, clause 33c
“protective clauses – new Jason clause”).
10.15 Collision
Collision between ships or between, for example, a vessel and a quay, a dolphin,
a shore crane or a similar object can give rise to considerable loss or damage
to the vessel, goods or other property. Delay is very often caused and in some
cases people are injured or even killed. The governing rules about liability in
respect with collisions are complicated and cannot be fully discussed in this
13 BIMCO BIMCO to Refer to New York-­Antwerp Rules 2016 in Future Documents (www.bimco.
org, accessed 17 April 2017); Sarll, R. and Kemp, A. (2016) York-­Antwerp Rules 2016: A Summary
(Shipping & Trade Law, Informa plc., 15 July 2016); Norwegian Hull Club (2016) York Antwerp
Rules 2016 Finally Approved (www.norclub.no, accessed 12 May 2016).
14 BIMCO New Jason Clause (www.bimco.org, accessed 17 April 2017).
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book. However, as many contracts of carriage contain a so-­called “both-­to-­blame
collision clause”, some basic elements will only be explained here.
The “Brussels Collision Convention” or “Collision Convention 1910” or formally “the Convention for the Unification of Certain Rules of Law with respect
to Collisions between Vessels” is a 1910 multi-­lateral treaty that established the
rules of legal liability that result from collisions between ships at sea. According
to the Convention, three general rules are applying:
1. If a collision occurs that is accidental or of uncertain cause, the damages
are borne by the party that suffers them.
2. If a collision occurs that is the fault of a party, the party at fault is liable
for the damages that were caused.
3. If a collision occurs that is the fault of more than one party, the parties
at fault are liable in proportion to the faults respectively committed. If it
is not possible to determine the proportional fault, the liability is apportioned equally between the parties at fault.
Therefore, from the Collision Convention 1910 it is inferred that, when two
ships are to blame for a collision, the cargo in vessel A can recover its loss from
vessel B in the same proportion as if B was to blame for the collision. But, if
the contract of carriage exempts the owner of vessel A from liability for loss or
damage to cargo when the loss or damage is caused by error in navigation (see
section 6.6.5), the owner of cargo on board vessel A cannot get the remaining part
from owner A. Furthermore, the Collision Convention 1910 has not been ratified
by the United States and according to US law the cargo in vessel A can recover
the whole of its loss from vessel B, which in turn can get 50% of this loss back
from vessel A, notwithstanding the fact that vessel A is exempted from liability
for damage caused by nautical error.
The “both-­
to-­
blame collision” clause was designed with the intention of
achieving the same result under US law as under international law as described
by the Collision Convention 1910. However, the clause has been held by the US
Supreme Court to be void and cannot be enforced in the USA. The clause can
therefore only be invoked under very special circumstances outside the USA.
To sum u­ p, according to the Hague-­Visby Rules, if the carrier has exercised
due diligence to provide a seaworthy ship, he is not liable for cargo claims resulting from a collision partly or wholly caused by negligent navigation (Hague-­
Visby Rules, art. IV, par. 2a). Since it is common that both vessels are partly to
blame for a collision, cargo interests may then present their claims in tort against
the non-­carrying vessel. Under US law, claimants could recover their claims in
full from the owners of the other vessel, who could then recover one half from
the carriers. But, this circumvents the navigational error defence, creating also
the anomaly that cargo interests cannot recover if the carrying vessel is wholly
to blame. Therefore, the both-­to-­blame clause is designed to preserve the protection which the carrier has under the Hague-­Visby Rules by giving a contractual indemnity against the cargo interests. Further to that, charterparties usually
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contain a clause requiring that all bills of lading issued must also contain the
both-­to-­blame clause, providing an indemnity if not incorporated.15
The “both-­to-­blame collision” clause is one of the “protective clauses” typically found in a dry cargo voyage charterparty (see appendix 1, Gencon ’94, part
II, clause 11 “both-­to-­blame collision clause”), in a tanker voyage charterparty
(see appendix 2, Shellvoy 6, part II, clause 35 “both to blame clause”), as well
as in a time charterparty (see appendix 6, NYPE 2015, clause 33(b) “protective
clauses – both-­to-­blame collision clause”).
The “BIMCO both-­to-­blame collision clause” has the following wording16:
“If the Vessel comes into collision with another ship as a result of the negligence of
the other ship and any act, neglect or default of the Master, Mariner, Pilot or the
servants of the Carrier in the navigation or in the management of the Vessel, the
owners of the cargo carried hereunder will indemnify the Carrier against all loss
or liability to the other or non-­carrying ship or her Owners in so far as such loss or
liability represents loss of, or damage to, or any claim whatsoever of the owners of
said cargo, paid or payable by the other or non-­carrying ship or her Owners to the
owners of said cargo and set-­off, recouped or recovered by the other or non-­carrying
ship or her Owners as part of their claim against the carrying Vessel or Carrier.
The foregoing provisions shall also apply where the Owners, operators or those
in charge of any ship or ships or objects other than, or in addition to, the colliding
ships or objects are at fault in respect of a collision or contact ”.
10.16 International Safety Management Code (ISM)
The International Safety Management (ISM) Code applies compulsorily under
international law to all cargo vessels and mobile offshore drilling units of 500
gross tonnage and upwards. The Code has been implemented to all passenger
ships (including high-­speed craft), oil tankers, chemical tankers, gas carriers,
bulk carriers and cargo high-­speed craft since 1 July 1998, while other cargo
ships, such as containerships and mobile offshore drilling units have been obliged
to comply with the Code since 1 July 2002.
As it was self-­explanatorily stated by BIMCO17:
“The ISM Code represents only one part of the substantial volume of regulations to
which shipowners are bound under the law of the Flag State. As part of the SOLAS
Convention 1974, as amended, implementation of the ISM Code is mandatory for all
Contracting States under international law. Most standard charterparties contain
fairly all-­embracing provisions requiring the owner to ensure that the vessel is in
full compliance with all relevant international rules and regulations, and possesses
the necessary certificates, to permit the vessel to trade within the agreed trading
limits. Therefore, from a strictly legal point of view, BIMCO considers that there is
no readily identifiable contractual need to make a specific reference to the ISM Code
in a voyage or time charter.
15 Skuld (2009) Both-­To-­Blame Collision Clause (www.skuld.com, accessed 4 September 2009).
16 BIMCO Both-­to-­Blame Collision Clause (www.bimco.org, accessed 17 April 2017).
17 BIMCO BIMCO Standard ISM Clause for Voyage and Time Charterparties (BIMCO Special
Circular No. 1, 4 February 1998).
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COMMON CHART E RPART Y CL AU SES & CO N C EPTS
Nevertheless, in response to the demand of Members and for those who may feel
more comfortable incorporating a specific reference to the ISM Code in their charterparties, BIMCO has devised a broad and neutrally worded ISM Clause ”.
BIMCO has introduced the following standard ISM Clause for voyage and
time charterparties:
“From the date of coming into force of the International Safety Management (ISM)
Code in relation to the Vessel and thereafter during the currency of this Charterparty, the Owners shall procure that both the Vessel and ‘the Company’ (as defined
by the ISM Code) shall comply with the requirements of the ISM Code. Upon request
Owners shall provide a copy of the relevant Document of Compliance (DOC) and
Safety Management Certificate (SMC) to the Charterers.
Except as otherwise provided in this Charterparty, loss, damage, expense or delay
caused by failure on the part of the Owners or ‘the Company’ to comply with the ISM
Code shall be for the Owners’ account ”.
10.17 Piracy
Piracy clauses setting out party rights and obligations in response to increasing
piracy risks were first issued in 2009. BIMCO initially drafted three provisions
respectively for time charterparties, consecutive voyage charters/COAs and
single voyage charters. However, following a recent court case, changing trade
practices, the need for clarifying charterers’ liabilities after a vessel is released
following seizure, as well as insurance matters, a review was made by BIMCO
to all three clauses in 2013 to ensure that the provisions remain in line with
commercial requirements. BIMCO strongly recommends that the latest versions
of the piracy clauses should always be used.18 The specific wording of “BIMCO
piracy clause for time charter parties 2013” may be seen in appendix 6, NYPE
2015, clause 39. The relevant provisions about single voyage charters and consecutive voyage charters/COAs may be sourced by BIMCO.
18 BIMCO BIMCO Revised Piracy Clauses (BIMCO Special Circular No. 7, 19 July 2013).
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CHAPTER 11
Voyage charter
This chapter examines in detail typical clauses found and critical matters accruing from a voyage charter. Initially, the importance of an accurate vessel’s
description, the nomination of safe ports and berths, the execution of the voyage
with utmost despatch and with no deviation, as well as problems related to the
quantity or the quality of the cargo, are highlighted. Then, various freight matters
are commented, comprising the fixing, the risk, the payment and the security of
freight, the deadfreight and the brokerage commission. In addition, the crucial
allocation of costs is discussed concerning loading/­discharging and other cargohandling costs, harbour costs, freight taxes, delays from strikes and agency
expenses. Analysis goes further to deal with other specialised voyage charter
subjects, as the lien, the cargo liability and the damage to the vessel. The content
of the chapter is enriched with examples from real clauses sourced from standard
forms of voyage charterparties; both dry and tanker. Finally, due to the extent of
analysis and the weight of importance, the key voyage charter issue of laytime
and demurrage is referred to chapter 15. Thus, it is recommended that the reader
should study this chapter together with chapter 15, consulting also the glossary
and appendix at the end of the book, where necessary.
11.1 Definition
Types of charter have been presented in section 7.3. In particular, voyage charter
was covered in section 7.3.1. At this point, only a short definition of the voyage
charter will be provided.
A voyage or spot charter concerns the case where a vessel is chartered for a
single voyage between certain ports. Practically, the owner promises to load on
board his (named) ship an agreed quantity of cargo which has to be transported
from specific loading port(s) to specific discharging port(s). The voyage charterer
pays freight per ton of cargo carried. The charter agreement is governed by a voyage charterparty. This form of charter is typical and common within bulk/­tramp
trading (open charter market), but almost impossible to find in the liner market
since at this type of business liner carriers themselves are those who undertake
to carry out the scheduled voyages with owned or period-­chartered vessels chartered from individual shipowners. In a voyage charter, the owner retains the operational control and the commercial management of the vessel, being responsible
for all the (variable) voyage expenses, such as bunkers, port charges, canal dues,
extra insurances, etc., further to the (fixed) daily running costs of the vessel, such
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V oyage charter
as manning, maintenance and repair, insurance, etc. The charterer’s costs are
usually only expenses and charges relating to the cargo.
The most significant subjects of a voyage charterparty are the description of
the voyage, the cargo and the vessel, the allocation of duties and costs in connection with loading and discharging of cargo, the specification and payment of
the freight, the laytime and demurrage rules, the allocation of the liability for
the cargo and the allocation of other costs and risks. Depending on the circumstances, other questions and clauses can also be very important in the negotiations between the owners and the charterers. The most critical parts of a voyage
charter are discussed below.
11.2 Vessel
11.2.1 Description of vessel
In most cases a specific ship is nominated. Thus, the vessel’s name, IMO identification number and call sign, year of build, nationality, deadweight, gross and
net tonnage and sometimes speed are stated in the charterparty. The need for the
description of the vessel in the voyage charterparty very much depends on the
circumstances. The type of cargo and the intended ports and seaways especially
determine what details about the ship must be mentioned during the negotiations
and in the charterparty.
The ship’s draught, length, breadth and sometimes also the height over the
waterline (air draught) can be very important in narrow seaways and ports and in
passage under bridges and hanging power-­lines. Also, the equipment for cargo handling (winches, cranes, pumps, etc.) and the design and condition of the cargo compartments are often important for the vessel’s fitness for the intended cargo. The
number of hatches, type of hatch covering, as well as the length and the breadth of
hatch openings and ramps are important details when the charterers and the owners
estimate the speed and cost for loading and discharging of cargo. Some cargoes
may need special equipment, such as reefer plant and CO-equipment. In oil transportation the pumping capacity of the vessel has particular importance.
Both the owners and the charterers must, as far as possible, try to specify
all those details about the cargo and the vessel that are necessary for economic
calculation and practical planning of the loading, carrying and discharging of a
cargo. If the cargo or the ship have some unusual or unexpected qualities, the
other party should be made aware of these.
11.2.2 Specification of vessel’s cargo carrying capacity
The specification of the vessel’s cargo capacity is important. It can be described
in several ways, with the deadweight capacity and the cubic capacity being the
most common ones.
The deadweight capacity is the ship’s weight-­carrying capacity, usually specified in metric tons (or tonnes), but sometimes still in long tons (see analytically
appendix 16 about measurements). The deadweight capacity normally includes
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Voyage charter
the vessel’s capacity, not only for cargo but also for fuel, fresh water and stores.
To avoid mistakes and to make clear that fuel etc. is also included, it is common to
add the words “all told ” to the deadweight capacity figure. Instead of “deadweight
all told” (DWAT ), the “deadweight cargo-­carrying capacity” (DWCC ) is sometimes used (see DWAT and DWCC in glossary). For instance, Gencon ’94 uses
the “dwt all told” expression (see appendix 1, part I, box 7 and part II, clause 1),
while Gencon ’76 (part I, box 7 and part II, clause 1) uses the “dwt cargo carrying
capacity” term. The difference between deadweight capacity and the deadweight
cargo-­carrying capacity is that the cargo-­carrying capacity does not include the
capacity necessary for fuel, freshwater, stores or other extras. It must be noted that
when the deadweight capacity is stated in the charterparty, the owners are not free
to bunker the vessel as they wish. Bunker quantity, as well as freshwater, stores
etc., must be adjusted to the intended voyage (including, of course, the necessary
safety surplus of bunkers). If the vessel has unjustified high quantities of bunkers
on board and the charterers thereby cannot use the ship as intended, the owners
may be held liable for damages against the charterers. These damages may include
both reduction of freight and compensation for the charterers’ extra costs to ship
the cargo in another vessel. If the cargo is perishable, e.g. bananas, the owners also
risk liability for damage to the cargo as a result of short shipment. Both the deadweight capacity (dwat) and the cargo-­carrying capacity (dwcc) must be related to
certain vessel’s marks (e.g. concerning loadlines, draught, freeboard etc.).
The vessel’s cubic capacity is typically used for dry cargo vessels and stated
both in grain and in bale. The bale capacity is the volume available for boxes,
cartons or other general cargo, etc. The grain capacity, which almost always is
higher than the bale capacity, also includes those parts of the cargo holds that
can be filled with “floating”, homogeneous, dry bulk cargo, such as grain, phosphates, etc. (see terms BL, Cargo Capacity, GR and SF in glossary).
Both the deadweight capacity (or dwt cargo-­carrying capacity) and the cubic
capacity are usually stated in connection with the word “about ”. This word does
not relieve the owners from their obligation to state the capacity as accurately as
possible.
The specification of vessel’s cargo carrying capacity is crucial as far as
voyage estimation is concerned. Voyage estimation principles are analysed
in section 14.1, while, more specifically, measurement of cargo is covered in
section 14.1.2.2.
11.3 Voyage
11.3.1 Nomination of ports – rotation
The place for loading or discharging of cargo can be agreed in several ways, for
instance:
• a fixed berth, for example “berth 2 at Lagos”;
• a fixed port, for example “1 safe berth Sydney”;
• a fixed area, for example “1 safe port / 1 safe berth Japan”;
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V oyage charter
• a port or an area for order, for example “US Gulf for order”; or
• several berths and/­or ports, for example “berth 2 at Lagos and 1 safe
berth Casablanca”.
If a port is to be nominated later, thus not being fixed in the charterparty, then it
is advisable to state the latest time at which the charterers can nominate the port.
For example, such a clause may have the following wording:
“Loading ports to be nominated by Charterers latest when the vessel is passing
Gibraltar”,
or
“Discharging port to be nominated by Charterers latest at commencement of
loading”.
When no such clause is inserted into the charterparty, the charterers should
nominate the port or ports well in advance so that no extra cost for waiting time
and deviation is caused to the vessel. When the charter agreement contains several loading ports or discharging ports, it is common that the owners try to introduce a clause providing that the ports shall be called “in geographical rotation”.
The intention is to avoid extra steaming time.
Unless otherwise expressly agreed or customary, the charterers are entitled and
have a duty to appoint a berth for the vessel. The charterers cannot nominate any
port or berth and the owners are not strictly obliged to follow any directions from
the charterers. Most voyage charterparties state that ports and berths shall be safe.
The voyage charterparties usually also contain an ice clause and a near clause.
These critical aspects are presented below.
11.3.2 Safe port, safe berth, always afloat
Most charterparties state that the ports and berths nominated by the charterers
shall be safe. The word “safe” in this context refers not only to factors such as
high winds, heavy swell, insufficient or bad construction of quays, dolphins, etc.,
but also to other factors such as warlike operations and political disturbances
(these last-mentioned factors are often dealt with in special war clauses as seen
in section 10.7).
In the majority of charters this implied obligation is reinforced by an express
term to the same effect. A classic definition of a safe port was provided by
Sellers LJ in the Eastern City [1958] 2 Lloyd’s Rep. 127:
“. . . a port will not be safe unless, in the relevant period of time the particular ship
can reach it, use it and return from it without, in the absence of some abnormal
occurrence, being exposed to danger which cannot be avoided by good navigation
and seamanship”.1
1 Wilson, J.F. (2008) Carriage of Goods by Sea (London, Pearson Longman, 6th edition, p. 25).
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Voyage charter
A stipulation in the charterparty that charterers shall nominate safe ports and
safe berths does not mean that the owners and the master can refrain from investigating the safety of the port and the berth. Neither are the charterers strictly
liable for their safety. It is difficult to find the borderline between the respective
parties’ liability and the obligation to investigate, and it is in most questionable
cases impossible to establish beforehand whether a certain port or berth from a
legal point of view is safe or not.
As a general rule, it can be said that the earlier the owners and the master are
informed about intended ports and berths, the more liability rests on them as
regards investigation of the safety. Consequently, when during the negotiations
and in the charterparty agreement have accepted a certain port or a certain berth,
they have little chance of getting damages from the charterers if the port or the
berth turns out to be unsafe. On the other hand, the charterers have little chance
of escaping liability for damage to the ship when the finally unsafe port or berth
has been nominated after the negotiations and the fixture. In the latter case, the
owners and the master have had little or no chance to influence the choice of port
or berth.
Another general rule is that, where the master has agreed to call at a certain
port or to moor at a certain berth, it does not mean that the owners’ right to claim
damages from the charterers has been waived. The charterers’ liability for safety
remains even when the master has made an excusable wrong decision and called
at a port which later turned out to be unsafe.
Disputes about safe ports and safe berths are very complicated, especially as
regards production of evidence. The outcome of a dispute very much depends on
the law which governs the charter agreement. Apart from safety, it is also common that the charterparties contain a special statement stipulating that the ship
shall always “lie afloat ”. However, it may be agreed that charterers are entitled to
nominate a berth where the vessel can “lie safely aground ” (see terms AA, AAAA
and NAABSA in glossary).
11.3.3 Near clause
There is an obligation on the owners to take the vessel to the agreed loading or
discharging place. In order to protect the owners against unforeseeable difficulties, a so-­called “near clause” is often inserted in the voyage charterparty. In
Gencon ’94 (see appendix 1 part II, clause 1 “preamble”), the relevant provision
reads (inter alia):
“The said Vessel shall, as soon as her prior commitments have been completed,
proceed to the loading port(s) or place(s) stated in Box 10 or so near thereto as she
may safely get and lie always afloat . . .”.
There is a similar clause for the discharging port. The intention of the clause
is to protect the owners against such hindrances that arise after the negotiation
and the fixture. When such a hindrance arises, the owners are not obliged to
take the ship closer to the agreed place or port than she can safely get and lie
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V oyage charter
always afloat. When judging whether a port is safe or unsafe, there is a difference
between those cases where the vessel – according to the charterparty – is ordered
to a certain berth or port and those cases where the vessel is ordered to a certain
range of ports. In the first case, there is an obligation on the owner to find out
beforehand whether the ship can safely go to the nominated port or the berth. In
the latter case, it is the charterers’ duty to make sure that they nominate ports and
berths suitable for the vessel.
When the normal route is hindered, the owners cannot usually rely on the near
clause where there is a possibility of reaching the port or the berth via another
route, even if this means extra costs for the owners (see also the comment about
frustration in sections 10.4.1 and 10.8.5). Neither can the owners rely on the near
clause when the obstacle is temporary.
11.3.4 Ice clause
In some trades and at times of the year where there is risk of ice, the charterparty
must contain a so-­called “ice clause”.
In section 10.4.2 regarding a vessel’s trading limits, it was mentioned that
hull underwriters define special trading limits for all vessels, based on ice and
weather conditions in certain areas. It goes without saying that the owners cannot
accept ports or trading areas outside these limits and, when there is a possibility
of breaking the trading limits against extra insurance, the owners should be very
cautious. Under all circumstances, the owners must insist on having a sufficient
ice clause when there is any risk of ice on the intended voyage. The near clause
gives the owners some – but far from sufficient – protection in this respect.
Indicative questions that must be dealt with in the ice clause are:
• Is there an obligation on the owners to let the vessel break ice or follow
an ice-­breaker?
• What possibilities have the owners to refuse a certain port or area, or to
order the ship to leave before loading or discharging is completed, when
there is a risk of the vessel being frozen in?
• Are the owners entitled to full, or only reduced, freight when the vessel
has to leave the loading port with only a part cargo?
• Who shall decide what to do with the cargo on board when it is impossible to reach the originally intended discharging port?
• Who shall pay for delay caused to the ship as a result of ice or ice risk at
the loading port, sea voyage or discharging port?
• Who shall pay for extra insurance on the vessel and damage caused to
the ship by ice?
All the above and other similar questions are important when there is a risk of
ice. It should also be noted that delay of the ship by reason of cold weather can be
dealt with in the laytime clauses (see chapter 15) and the contracting parties to the
charterparty must ensure that these clauses are not contradictory to the ice clause.
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Voyage charter
In Gencon ’94 (see appendix 1, part II, clause 18 “general ice clause”) there
is a printed ice clause. The provision has one section for the “port of loading” and
one for the “port of discharge”. Each section is divided into three sub-­sections;
the first dealing with ice problems or risks in the port before the vessel’s arrival,
the second dealing with ice problems or risks in the port after the vessel’s arrival
and the third dealing with other problems/­questions. The rather odd phrase of
Gencon ’76 stating that the ice clause was not applicable in the spring has been
deleted in Gencon ’94.
When “ice-­class vessels” (i.e. specially designed and constructed vessels for
trading in ice) are chartered for a voyage where ice can be expected, the traditional ice clauses are usually avoided from the charterparty. Instead, special
“tailor-­made” clauses may be drafted.
BIMCO last revised its ice clauses in 2005 and created a standard clause for
voyage charters, the so-­called “BIMCO Ice Clause for Voyage Charter Parties”.
The relevant amendments were made because the previous ice clauses were
silent on the issues of forcing ice and following ice breakers. Besides, provisions
were needed to protect the owners against the risk of ice being experienced on
the approach voyage. Consequently, in the revised clause a provision was added
that makes it clear that the vessel should not be obliged to force ice, but may reasonably be expected to follow ice breakers where other vessels of the same size,
class and construction are doing so.2
11.3.5 Sea voyage
Sometimes the charterparty expressly states what route the vessel shall take, for
instance “Sydney to Lisbon via Cape of Good Hope”. With such a clause the owners or the master cannot direct the vessel via the Suez Canal. Without such or a
similar clause concerning the route, the master will choose the usual route or one
of the usual routes. In any case the master has the right to make such alterations
of route or necessary deviations as he deems advisable for the safety of the crew,
vessel and cargo. As a general rule it can be said – and this is also an implied
term of the contract – that the master shall carry out the voyage with the utmost
despatch.
11.3.6 Deviation
The word “deviation” basically embraces only the geographical deviation of the
vessel from the appropriate route. However, it must be remembered that the concept of deviation also contains deviation other than geographical. As examples of
non-­geographical deviation stoppage, slow-­steaming (i.e. steaming with reduced
speed) and unusual handling of the cargo may be mentioned. It is difficult to give
a precise definition of deviation.
2 BIMCO BIMCO Ice Clauses (BIMCO Special Circular No. 1, 24 February 2005).
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V oyage charter
As mentioned in regard to the Hague-­Visby Rules (see section 6.6.5), the distinction between lawful deviation and unlawful deviation is critical. The borderline between these two concepts is not always so easy to find. Generally, it can be
said that deviation for the purpose of avoiding danger to crew, vessel and cargo
and deviation for the purpose of saving life or property at sea are lawful deviations. Naturally, the deviation must be reasonable and, when judging whether the
deviation is reasonable, not only the interests of the owners but also the interests
of the charterers must be considered.
Most voyage charterparty forms contain a printed deviation clause. Sometimes
this is called “scope of voyage” clause which is also the frequent expression used
in bills of lading. The deviation clause in Gencon ’94 (see appendix 1, part II,
clause 3 “deviation clause”) has the same wording as that of Gencon ’76, which
is the following:
“The vessel has liberty to call at any port or ports in any order, for any purpose, to
sail without pilots, to tow and/­or assist vessels in all situations, and also to deviate
for the purpose of saving life and/­or property”.
The deviation clauses are usually worded to the benefit of the owners, but interpreted to the benefit of the charterers (or cargo owners) and if an owner really
wishes to safeguard his rights to deviate for a certain reason he must specify this,
as clearly as possible, during the negotiations and in the charter agreement. When
bunker prices have risen and when for some time it has been difficult to get bunkers, special bunker deviation clauses become common. These clauses not only
give owners the right to deviate for the purpose of getting bunkers, but also they
usually state expressly that the owners have the right to order the ship to proceed at
reduced speed so as to get a lower bunker consumption. It should also be stressed
that re-­routeing for the changing of crew is often regarded as unlawful deviation.
Unlawful deviation is a breach of contract and in some cases the charterers
may be entitled to damages as well as to cancel the charter agreement. Under
the typical terms of the bills of lading and according to common P&I rules, any
unlawful deviation of the vessel is not permitted. It must be emphasised that even
if the charterparty includes a “liberty clause” giving permission to the vessel to
deviate for bunkering, this liberty to deviate depends in fact on the wording of
the bill of lading. It is the cargo owner (namely the holder, at any time, of the bill
of lading) that provides permission to deviate. Without bill of lading permission,
there is no right to deviate, and therefore P&I cover is frustrated and deviation
insurance is required.3
11.4 Cargo
11.4.1 Type, specification and condition of cargo
The description of the cargo is important for several reasons. Owners who, during the negotiations and in the fixture, accepted a certain cargo are also obliged
3 Swedish Club Deviation Insurance (www.swedishclub.com, accessed 25 April 2017).
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Voyage charter
to carry out the transportation of this cargo. This means that the owners have to
get all necessary details of the cargo from the charterers or from someone else
(e.g. shippers), in order to be able to find out whether the cargo is suitable for the
vessel and estimate the costs of cargo handling and transportation.
What exact details about the cargo need to be specified during the negotiations
and in the written agreement depends on the type of cargo. Some commodities
are so well known to the parties that only a very short specification has to be
given. In other cases it may be necessary to give a detailed declaration about the
physical and chemical specifications of the cargo, followed by specified instructions for its handling and transportation.
If the cargo delivered to the vessel is not in accordance with its description, the
owners may be entitled to compensation. In some cases, when the cargo delivered differs on essential points from the given description, the owners may also
be entitled to cancel the agreement and claim compensation for loss of freight.
When the cargo is described as “general cargo”, it is necessary to insert special clauses about the carriage of dangerous goods. In such a “dangerous cargo
clause” the owners usually limit their obligation to carry dangerous cargo, while
the charterers are under an obligation to give all essential details of the cargo to
the owners well in advance of loading.
In transportation of oil products, the carrier must always be aware of the
difficulties or peculiarities related with cargo handling, problems occurring in
loading/­discharging, while he must also be familiar with caution needed to prevent from fire and explosion, as well as from damage to tanks, coatings, and
pipelines. This may be particularly complicated with regard to oil products or
chemicals, but also to some extent in relation to the crude oil cargoes. Crude oil
may be dangerous when it is spiked with naphtha to ease the flow. Some kinds of
crude oil cargoes are sulphurous and corrosive, while others have a waxy deposit.
In low ambient temperatures the question may be whether the heating coils in the
tanks are effective enough and whether a considerable amount of bunker fuel will
have to be spent in maintaining or increasing the temperature. This may create
problems for both the ongoing voyage and subsequent trading of the vessel.
A particular problem relates to the heating of cargo, i.e. whether the owner
has an obligation to raise the cargo temperature. Shellvoy 6 (see appendix 2, part
II, clause 27 “heating of cargo”) is based on owners’ “best endeavours” principle to comply with a charterers’ request to change the cargo temperature, while
charterers shall pay for any additional bunkers consumed, and any consequential
delay to the vessel shall count against laytime. Suffice it here to point out that the
parties should be aware of the problems that may occur in such cases, particularly
regarding cost and time.
11.4.2 Cargo quantity
It is important both for the charterers and for the owners that the cargo quantity is
clearly specified. The freight is often calculated on the quantity of cargo carried
and the owners must therefore make certain that at least a minimum quantity is
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stated in the charterparty. For the charterers, the specification of the cargo quantity in the charterparty is critical as the owners’ acceptance of the quantity also
means that the charterers have a chance to claim damages if the owners fail to
load the accepted quantity.
The cargo quantity can be fixed in several ways. Many charter agreements
state that the charterers shall furnish the ship with “a full and complete cargo”.
This means that the charterers are obliged to load as much cargo as the vessel can
carry, that is, the vessel’s deadweight capacity is fully used when it is a heavy
cargo and the cubic capacity is fully utilised when it is a light cargo.
There are various other ways to state the cargo quantity, such as “x tons”,
“about x tons”, “between x and y tons”, “between about x and about y tons”, “not
less than x tons”, etc. The word “about ” gives a flexibility that varies depending
on the type and quantity of the cargo and the trade (5% is often regarded as a
recognised variation figure). If the charterparty prescribes a specific variation
from the agreed quantity, it should also state in whose discretion there is such
flexibility, for instance “in owners’ option”, “in master’s option” or “in charterers’ option”. If, for some reason, it is important that certain quantity limits must
not be exceeded or underdrawn, this should be clearly stated at the charterparty
and a special note should be served to the master and to the agents.
When quantities are expressed during the negotiations, in the charter agreement and in the voyage instructions, the type of ton referred to should always be
explicitly mentioned. It is thus not sufficient to say, for instance, 5,000 tons. It
must also be stated what kind of tons are meant, namely metric tonnes (or metric
tons) or long tons. This can also be important when the stowage factor (i.e. the
number of cubic feet a ton will occupy in stowage) is used, as the stowage factor
is sometimes based on long tons and sometimes on metric tonnes (see appendix
16 for measurements and stowage factor, as well as term SF in glossary).
11.5 Freight
In the respected legal text Scrutton on Charterparties and Bills of Lading,4 freight
is described in the following way:
“Freight is the reward payable to the carrier for the carriage and arrival of the
goods in a merchantable condition, ready to be delivered to the merchant ”.
11.5.1 Fixing of the freight
The freight can be fixed in several different ways. One way is to base it on
the cargo quantity, for instance “X $ per metric tonne” or “X $ per ctn” (ctn =
carton). Another way is to fix the freight at a certain amount independent of
the cargo quantity. This is usually called “lump sum freight ”. A variation on the
4 Scrutton, T.E., Boyd, S.C., Burrows, A.S. and Foxton, D. (1996) Scrutton on Charterparties
and Bills of Lading (London, Sweet & Maxwell, 20th edition, p. 323).
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lump sum freight is to base the freight on the size of the vessel, for instance
“X $ per deadweight ton”. This solution is used especially in quantity contracts
(see chapter 13) where the voyages are performed by different ships often not
known when the contract is fixed. In oil transportation (crude and products) spot
freight rates are typically determined in accordance with the so-­called “Worldscale
system” which is presented and analysed with practical examples in section 14.3.
Nevertheless, within the broader tanker family, the freight rates for gas carriers
and chemical tankers are not expressed by Worldscale rates, but the former is
typically reported in “$ per cubic metre” and the latter in “$ per ton”.
When the freight is based on a certain amount “per ton” it is again important to
make clear what kind of ton is meant (metric tonne or long ton).
Sometimes disputes may arise from the question whether the freight should be
based on intake or delivered quantity or if it should be based on the gross or the
net weight of a cargo. Concerning the latter problem, it is usually said that the
freight will be based on the gross weight unless otherwise agreed or customary
in the trade. As regards the first question, the basic rule under English law is that
the freight is payable only on so much cargo as has been shipped, carried and
delivered and this means that the smallest of the two quantities (i.e. received or
delivered) is the base for the calculation of freight. Both these questions are often
expressly dealt with in the charterparties. On this point, reference should be made
to cargo retention clauses (see section 11.10.3 below).
11.5.2 Freight risk – when is the freight earned and payable?
The principal rule is that the freight is earned when the owners have fulfilled
their obligation to carry the cargo and are ready to deliver it to the receiver. Thus,
the master should, figuratively speaking, deliver the cargo with one hand at the
same time as he collects the freight with the other. This means that if, for some
reason, the owners cannot deliver the cargo, they are not entitled to freight. The
freight risk, that is, the risk that the owners, fully or partly, fail to fulfil their obligation to carry the cargo and thereby lose their right to collect freight, thus lies
with the owners. Should the vessel sink and, together with the cargo, be a total
loss, the owner is not entitled to freight even if the vessel has almost reached her
destination.
According to this rule, if only part of the cargo is delivered at the port of destination (short delivery, shortage), the owners are entitled only to proportionate
freight for the cargo actually delivered. If the cargo reaches the port or place of
destination in a damaged condition, the owners are entitled to freight only if the
cargo is “in a merchantable condition” and if it is still the same kind of cargo. In
connection with a shipment of cars, for instance, the owners are entitled to freight
for damaged cars only if the cars can still be considered as cars, and not as scrap
metal, and if the damaged cars have some value.
The owners’ right to collect freight must not be confused with their obligation
to pay compensation for the damaged cargo. It is worth noting also that the charterers have basically no right to deduct counterclaims for damaged cargo or other
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counterclaims from the freight. According to English law, freight is normally payable in full even if the charterers have a justified counterclaim against the owner.
However, tanker voyage charterparties, however, often allow for deductions against
the freight and in practice these questions are solved through particular clauses.
If a lump sum freight is agreed, the owners are entitled to full freight even
if only some part of the cargo reaches the port or place of destination. But if
all cargo is lost, the owners are not entitled to freight, according to the above-­
described principle. If the cargo is delivered at the wrong place, the owners are
not entitled to freight according to English law. However, in some legal systems the owner will under such circumstances be entitled to a so-­called distance
freight, proportionate to the distance actually carried as compared with the total
distance. In order to collect freight, the owners must arrange transportation from
the discharging port to the correct port or place of destination agreed.
The rules about when the freight is earned and payable are often modified in
charter agreements. Clauses like “freight earned and payable upon shipment,
ship and/­or cargo lost or not lost ” are frequently found in voyage charterparties and mean that the owners are entitled to freight at the loading port and the
freight is not refundable if part or the whole cargo and the vessel do not reach
the destination.
When the freight risk lies with the owners, they can take out a special freight
risk insurance which covers the situation where the cargo is lost during the transportation. This is the so-­called “loss of earnings”5 vessel’s insurance cover which
protects the owner from loss of income arising from physical damage to the vessel in a wide range of situations. This insurance does not protect the owners
against insolvent charterers.
The payment of freight may also be secured by other measures which are presented below in section 11.5.5.
11.5.3 Deadfreight
When the charterers fail to deliver the agreed quantity of cargo to the vessel, the
owners will normally be entitled to compensation for their loss of freight. This
compensation is called “deadfreight ” and the respective amount is calculated by
deducting what is saved in owners’ costs from the freight that should be paid for
that part of the cargo which has not been delivered.
In order to secure the payment for the deadfreight claim the owners (or the
master) must arrange the following:
• They must get a declaration from the charterers that no further cargo
will be delivered to the vessel. It is not sufficient to get this declaration
from the shippers only, as the charterers may assert later that they could
have arranged additional cargo if they had been contacted before the
vessel sailed.
5 The Gard Group Loss of Hire Cover (www.gard.no, accessed 25 April 2017).
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• The vessel’s additional capacity, both in cubic and in deadweight, must
be established before commencement of loading. This can be done, for
instance, by an independent surveyor.
• In order to safeguard the possibility of exercising a lien over the cargo
against the receiver, a remark concerning the short shipment which
establishes the owners’ claim for deadfreight should be inserted into the
bills of lading (see section 11.5.5 below).
Another difficult question is to find out when the owners are entitled to let the
vessel sail from the loading port if they fail to get a declaration from the charterers that no more cargo is available, or when the charterers say that additional
cargo will come but nothing happens. As long as the owners get sufficient compensation in the form of an acceptable demurrage paid day by day, week by week
or on a similar basis, the problem is perhaps not so bad. The situation is worse
when the demurrage rate is low or not payable until after the voyage and when
owners fear that the charterers are insolvent or unwilling to pay. Questions and
problems arising from such situations are difficult to solve, therefore, the owners
should be careful and take legal advice before they order the vessel to leave the
port.
11.5.4 Payment of freight
Payment of the freight may not necessarily take place at the same stage as
when the freight is considered earned. It is thus possible and not unusual that
the voyage charterparties contain a clause stating that “freight is earned upon
shipment . . .” in combination with a provision dictating that “freight is payable
before commencement of discharging” (or “before breaking bulk”). Sometimes
the charterers and the shippers wish to have the bills of lading marked “freight
prepaid ”. In such cases the owners should insist that the freight is payable and
that they get the payment before the bills of lading are issued and delivered to
the shippers.
The payment process should be specified in the charterparty. Currency (see
section 10.8.1), mode and place of payment, name of bank and number of bank
account, etc., are usually stated in the payment clause. As the costs of transferring
the freight are sometimes quite high, they should also be allocated in the charterparty. An example of a freight payment clause is presented in Shellvoy 6 (see
appendix 2, part II, clause 5 “freight”). This should be connected with clause 10
titled “charterers’ failure to give orders” of Shellvoy 6, where the owners’ right
to terminate the charterparty if charterers fail to make payments is described as
follows: “. . .Charterers shall pay the full amount due within 14 days after receipt
of Owners’ demand. Should Charterers fail to make any such payments Owners
shall have the right to terminate this Charter by giving written notice to Charterers or their agents. . .”.
Serious trouble may be caused when some countries have restrictions on money
transfers abroad. In some countries, particularly in connection with demurrage, it
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is practically impossible to arrange a remittance to another country and a careful
owner should investigate these matters before he finally accepts the fixture.
In tanker charterparties regard should also be given to oil residues and possible
freight payable in that connection. For example, Shellvoy 6 (see appendix 2, part
II, clause 40(4) “oil pollution prevention/­ballast management”) contains some
reference to this point.
11.5.5 Security for payment of freight
As mentioned in section 10.12 which discussed maritime liens, the owners
usually have a legal and/­or a contractual lien over the cargo as security for the
payment of freight. As regards such claims and such freights which are due for
payment but not paid before the bills of lading are issued, the owners and the
master must ensure that a remark concerning a claim for non-­paid freight is made
in the bills of lading. Without such a remark the owners have no possibility of
exercising a lien over the cargo as security for claims and payments accruing
or due for payment before the issuing of bills of lading. Sometimes, the owner
succeeds in securing freight payment by way of an irrevocable letter of credit
(see section 6.4), which often gives the owner a fair security but at the same time
complicates the negotiations.
11.5.6 Brokerage
The role of shipbrokers has been analytically described in section 3.5.1. When
brokers have been involved in chartering negotiations, they are entitled to
commission. The so-­called “brokerage” is usually a certain percentage of the
freight. Brokers are not entitled to commission on demurrage and damages for
detention unless this is expressly stated in the charterparty or otherwise agreed.
However, the brokers commonly try and achieve to get commission on demurrage and damages for detention. Moreover, the printed charterparty forms often
entitle the brokers to some compensation if the charter agreement is cancelled or
otherwise terminated beforehand. An example of a brokerage clause can be seen
in Gencon ’94 (appendix 1, part II, clause 15 “brokerage”).
At a specific point the clause is difficult to understand, causing some ambiguity. The standard clause provides that:
“In case of non-­execution (of the charter) at least 1/3 of the brokerage on the estimated amount of freight to be paid by the party responsible for such non-­execution
to the Brokers as indemnity for the latter’s expenses and work ”.
It may not be clear enough to define who is for instance “the party responsible
for such non-­execution” when the owner and the charterer, after a dispute, compromise and agree to cancel the contract. Another problem may arise from the
fact that the broker under English law is not considered as a party to that contract
and therefore he cannot sue on the basis of the charterparty.
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11.6 Loading and discharging
The task of arranging and the respective costs for loading and discharging the
cargo may be allocated between the contracting parties in different ways. The
stipulation used in Gencon ’94 (see appendix 1, part II, clause 5(a) “loading/­
discharging – costs/­risks”) is the so-­called “f.i.o.s.t term”, where the charterers
are those who arrange and pay for all cargo-handling expenses. The provision
reads as follows:
“The cargo shall be brought into the holds, loaded, stowed and/­or trimmed, tallied,
lashed and/­or secured and taken from the holds and discharged by the Charterers,
free of any risk, liability and expense whatsoever to the Owners. The Charterers
shall provide and lay all dunnage material as required for the proper stowage and
protection of the cargo on board, the Owners allowing the use of all dunnage available on board. The Charterers shall be responsible for and pay the cost of removing
their dunnage after discharge of the cargo under this Charter Party and time to
count until dunnage has been removed ”.
The “gross terms” alternative included in Gencon ’76 has been deleted from
Gencon ’94 with the explanation that it is no longer commonly in use. However,
when gross terms are agreed in a charterparty, the wording may be as follows
(Gencon ’76, part II, clause 5(a) “loading/­discharging costs – gross terms”):
“The cargo shall be brought alongside in such a manner as to enable vessel to take
the goods with her own tackle. Charterers to procure and pay the necessary men
on shore or on board the lighters to do the work there, vessel heaving the cargo on
board ”.
According to the “gross terms” alternative, the borderline at loading is when
the cargo is delivered from the charterers/­shippers alongside the vessel at a place
where the vessel can reach the goods with her own tackle. At discharging, the
borderline is when the vessel delivers the cargo alongside to the recipients but
not beyond the reach of her tackle. This alternative can also be described as “from
hook to hook” and the intention is that the owners shall arrange and pay for all
work within the “hook to hook” period.
The gross terms alternative is the one commonly stated in the liner bills of lading and thus it is also called “liner terms”. However, the expression “liner terms”
is not very precise and should be avoided. The true definition of “liner terms”
originally was that the cargo should be loaded and discharged on the same terms
and conditions as were used by liner vessels for the same kind of cargo in the
same ports and berths. As the terms and conditions used by the liner vessels can
be difficult to find out and define, and as they can also vary within one port, both
parties must be sure that they know what the expression means for the intended
voyage before they use it in negotiations and in a charterparty.
When FIO terms have been agreed, the main part of the planning and the costs
of cargo handling lies on the charterers. They should not only deliver the cargo to
the vessel, but also load and discharge it. When similar alternatives apply, such
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as FIOS, FIOSPT, FIOST, FIOT, etc., the charterers are further obliged to undertake other relevant operations such as stowage, trimming etc. (see glossary for
the following terms: FIO, FIOS, FIOSPT, FIOST, FIOT and compare them with
FI, FILO, FILTD, FO, Gross Terms, Liner Terms, LIFO). It is also said that the
owners shall provide winchmen, but as this is quite unusual nowadays that part
of the clause is often deleted.
As the costs for handling the cargo at loading and discharging ports are often
an important part of the total costs for the voyage, both parties should, during the
negotiations, carefully investigate what costs will be involved in the intended voyage. It is of utmost importance that the clauses dealing with loading and discharging of cargo make sufficiently clear the allocation of costs, duties and liabilities.
The way the stowing, lashing and securing of the cargo is performed is also
significant for the safe carrying of the cargo and for the vessel’s seaworthiness.
The owners usually have some responsibility for the cargo and they are always
to a certain degree liable for the seaworthiness of the vessel. Even in those cases
where the charterers, according to the charterparty, should arrange for and pay
everything in connection with loading, stowing, trimming, lashing, securing
and discharging of the cargo, the master must ensure that the cargo is properly
handled and that the loading, securing etc. are performed in a way that does not
endanger the crew, the vessel and the cargo during the voyage. The master has
not only a right, but also an obligation, to intervene when the cargo is loaded,
stowed, secured, etc. in an unacceptable way with regard to the safety of the crew,
vessel and cargo.
The cargo-handling matters are fields of high interest and common dispute. It
is recommended to be studied together with section 6.6 about owners’/­carriers’
liability for cargo and chapter 15 about laytime.
11.7 Laytime
According to “Laytime Definitions for Charter Parties 2013” (see appendix 3):
• Laytime is defined as “the period of time agreed between the (contracting) parties during which the owner will make and keep the vessel
available for loading or discharging without payment additional to the
freight ”.
• Demurrage is defined as “an agreed amount payable to the owner in
respect of delay to the vessel once the laytime has expired, for which the
owner is not responsible. Demurrage shall not be subject to exceptions
which apply to laytime unless specifically stated in the charter party ”.
• Despatch is defined as “an agreed amount payable by the owner if the
vessel completes loading or discharging before the laytime has expired ”.
Laytime and demurrage are considered matters of crucial importance and fields
of intense disputes in voyage charters. Therefore, drafting of laytime clauses and
counting of laytime in theory and practice are addressed separately in chapter 15.
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11.8 Routines and allocation of costs
11.8.1 ETA notices
The voyage charterparty usually has clauses according to which the owners shall
keep charterers, shippers and receivers informed about the vessel’s position and
the estimated time of arrival (ETA) at respective ports. The purpose of these
clauses is to give charterers and/­or shippers and/­or receivers a chance to prepare documents, provide or receive the cargo and plan the loading or discharging
procedure.
A notice clause may have the following wording:
“Master to give telegraphic ETA-notice to Messrs. ‘X’ 96, 48 and 24 hours before
vessel’s estimated arrival to loading port ”.
Unless this is expressly agreed, owners are not strictly liable for the consequences if the vessel arrives later than indicated in the notices. For instance,
if the shippers or the receivers have to pay waiting costs for stevedores when
the ship arrives late due to bad weather or other hindrances outside the owners’
control, the owners are not liable for these extra costs. Only if the ETA notices
have been unrealistic when given, or if the master or the owners have intentionally delayed the ship or failed to inform about delay in relation to given ETA
notices, can charterers, shippers or receivers have a chance to get compensation
from the owners.
11.8.2 Allocation of costs
11.8.2.1 Harbour dues
A vessel’s call at port gives rise to several costs, for example costs for pilots, tugs,
mooring, lights, watchmen and dues for quay and cargo. The principal rule is that
dues which fall on the vessel and are calculated on the basis of the ship’s size
shall be paid by the owners and dues which fall on the cargo and are calculated
on the basis of the type and quantity of the cargo shall be paid by the charterers
(or shippers/­receivers).
It is possible for local rules to demand payment by the owners of dues that
are traditionally connected with the cargo or the cargo handling ashore. In the
relationship of port authority/­shipowner, the latter usually has no other choice
than to pay, but this does not mean that the shipowner is also responsible for the
cost under the charterparty. If the owners, under the rules of the port, have been
forced to pay for something which under the charterparty falls on the charterers,
the owners are entitled to recover from the charterers. To avoid disputes, the following clause may be inserted in the voyage charterparty:
“If one of the parties to this Charterparty has been forced to pay dues in connection
with calls at any port which, as between the parties, would have been the responsibility of the other party under the terms of this Charterparty, the latter shall compensate the former for such payment ”.
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11.8.2.2 Freight taxes
In many countries the tax system includes special taxes on freight and other taxes
connected with the loading or discharging of ships in the country. The parties
must agree on whose account such taxes shall be. The best way is to find out
exactly what taxes will be debited for the intended voyage. BIMCO has been
a valuable source of information concerning freight taxes imposed per country.
Taxes known beforehand can be dealt with directly in the charterparty but, as new
tax laws may be introduced with very short notice, it is also advisable to have a
clause dealing with the question in a more general way, as for instance:
“Taxes on freight or cargo to be for Charterers’ account and taxes on vessel to be
for Owners’ account ”.
11.8.3 Strike clauses
Considerable delays and costs may be the result of strikes in loading or discharging ports or in seaways through which the vessel has to pass on her voyage.
Therefore, voyage charterparties usually contain a strike clause dealing with the
various problems and costs resulting from strikes. Such clauses are often complicated to construe. The general strike clause was amended by BIMCO in Gencon
’94 in order to become less ambiguous than the Gencon ’76 respective clause.
Since strike clauses are complicated, only some questions and problems arising when such clauses are drafted will be spotted below:
• To what extent are owners entitled to compensation from charterers for
delay of the ship due to strike and how shall the compensation be calculated (demurrage rate, daily cost for vessel, market rate or other)?
• Liability for consequential losses?
• The parties’ rights to cancel?
• What is the situation where a part cargo is already on board when a
strike starts and prevents further loading?
• The owner’s rights to complete with other cargo in the same or other
ports when a strike bursts out?
• The charterers’ right to order the vessel to other ports?
Additional questions and examples on how such problems can be solved may
be found in the general strike clause in Gencon ’94 (see appendix 1, part II,
clause 16 “general strike clause”).
11.8.4 Agents
Normal practice in voyage chartering dictates that agents are paid by the owners. Notwithstanding this, it is not unusual that the agents are nominated by the
charterers, a situation that may sometimes be very difficult for the owner. When
agents are nominated by charterers, the owners sometimes appoint their own
agent – usually called a “husbandry agent ” – to take care of owners’ matters,
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such as repatriation of crew members, contact with shipyards, or generally representing the owners’ interests against the charterers, shippers or receivers.
If the agents are reputable and established, it may not be necessary for the
owners to have their own husbandry agents, but as it still happens too often that
port agents who are closely connected with shippers or receivers disregard their
obligations to the owners and take care of shippers’ or receivers’ interests, the
owners should always be careful when the port agents are not known to them.
In some countries and ports only one firm may be available as a port agent and
this firm often also acts as a representative for shippers or receivers as well as a
representative for P&I Clubs, hull underwriters, cargo underwriters, etc. It goes
without saying that it is difficult for one firm with all these functions to act in a
balanced way when there are conflicts between the various interests it represents.
11.9 Cesser and lien
11.9.1 Introduction
In voyage chartering it is not unusual for the charterparty to contain a clause
relieving the charterers from liability. The liability usually ceases from the
moment the vessel has been loaded. Such a clause, often given the heading
“cesser clause”, may have the following wording:
“Charterers’ liability to cease when cargo is shipped and Bills of Lading signed,
except as regards payment of freight, deadfreight and demurrage (if any) at loading
port ”.
The intention is that the owners shall turn to the cargo owners with any
additional claims as for instance demurrage at the discharging port, or to the
shippers for demurrage at the loading port. The cesser clause is usually combined with a “lien clause” according to which owners, as security for their
claims, have a lien on the cargo (see section 10.12). A lien clause may have the
following wording:
“It is also agreed that the Owners of the said vessel shall reserve to themselves the
right of lien upon the cargo laden on board for the recovery and payment of all
freight, deadfreight and demurrage (if any)”.
It may occur that the cesser and lien clauses are combined. This was the case
in the Gencon ’76 form (part II, clause 8), which had the heading “lien clause”.
The cesser clause was “hidden” at the end of the clause, as follows:
“Owners shall have a lien on the cargo for freight, dead-­freight, demurrage and
damages for detention. Charterers shall remain responsible for dead-­freight and
demurrage (including damages for detention) incurred at port of loading. Charterers shall also remain responsible for freight and demurrage (including damages for detention) incurred at port of discharge, but only to such extent as the
Owners have been unable to obtain payment thereof by exercising the lien on the
cargo”.
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In the Gencon ’94 form (see appendix 1, part II, clause 8 “lien clause”), the
“cesser-­part” of the lien clause (“but only . . . on the cargo”) has been deleted and
the provision has been amended considerably, as follows:
“The Owners shall have a lien on the cargo and on all sub-­freights payable in respect
of the cargo, for freight, deadfreight, demurrage and claims for damages and for all
other amounts due under this Charter Party including costs of recovering the same”.
11.9.2 Is the cesser clause justified and valid?
The cesser clause is rather out of date and out of current market practice, thus it
should not be proposed by charterers or accepted by owners. Notwithstanding
this, it may be found even in modern charterparties. One of the reasons for this
may be that the clause is often “hidden”, as in the above-­cited older Gencon
’76 clause (see 11.9.1). Another reason may be that the parties are sometimes
unaware of the seriousness of the clause. Even if the charterers and owners have
smoothly made several shipments with a cesser clause included in the charterparty, the owners should not take it for granted that the charterers will continue
to disregard the clause. Charterers may encounter economic problems or be in
dispute with the receivers and then, in order to protect their own interests, they
may perhaps read the charterparty more carefully and find that legally they have
an opportunity to avoid some expenses they originally thought they had to bear.
As regards the validity of the cesser clause, under English law it seems to be
an established rule that the cesser clause is valid only if it is combined with a
lien clause giving a legally valid right to lien which also is practically possible to
exercise in the relevant case (“cesser is co-­extensive with lien”). The charterer’s
liability shall cease if, and to the extent that, the owners have an alternative
remedy by way of lien on the cargo.6
11.9.3 Exercising the lien
Before the owners place a lien on the cargo, they must find out the legal and practical possibilities and difficulties in the actual country and port. In some countries
it is not legally possible to exercise a lien over cargo. Moreover, even if the
owners are legally entitled to exercise a lien over the cargo, it may nevertheless
be impossible for practical reasons. For instance, it may be that the only place,
shed, tank etc. where the cargo can be stored ashore is controlled by the same
person or company against whom the owners have a claim.
It is often legally doubtful whether the owners are entitled to exercise a lien by
keeping the cargo in the vessel, since in all circumstances they will, by such an
action, delay the vessel, causing additional costs and legal difficulties. In some
countries where legal security is less developed, although the owners may exercise a lien in a correct way, they can be involved in various difficulties which
delay the ship and thereby cause extra costs.
6 Wilson, J.F. (2008) Carriage of Goods by Sea (London, Pearson Longman, 6th edition, p. 303).
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Voyage charter
In view of all these possibilities, owners should always take legal advice and,
if they have reason to fear difficulties or hindrances, they should take care well in
advance of the ship’s arrival at the discharging port.
11.9.4 Owners collecting from receivers or shippers
When the owners, by a clause in the charterparty, have the right to collect demurrage from the receivers or shippers (see chapter 15 for the analysis of laytime and
demurrage), it should be clearly stated in the contract that the charterers remain
ultimately responsible. In addition, it should be stated after how long a time
the owners may claim payment from the charterers if they are not paid by the
receivers, shippers, etc. A clause which may be considered as reasonable and
could be accepted by owners is the following:
“Demurrage at discharging port to be settled directly between Owners and Receivers, but Charterers to remain ultimately responsible and in case payment from
Receivers is not effected within x days after discharging (or: after invoice date)
Charterers to pay demurrage to Owners”.
It goes without saying that the owners should accept such a clause only if the
charterers are reliable and solvent, as the owners in this situation have no way of
using the cargo as security for their claim against the charterers.
11.10 Cargo liability
The background knowledge of this entity has been presented in chapter 6 and
more specifically in sections 6.5 and 6.6, where the international statutory framework of the bills of lading together with the basic principles about carrier’s liability against cargo were covered.
In a voyage charterparty, the liability for the cargo shall be allocated as the
owners and charterers may agree. There is no compulsory minimum liability for
owners according to the contract law, as it is imposed by the international cargo
conventions (e.g. Hague Rules, Hague-­Visby Rules, Hamburg Rules, Rotterdam
Rules).
Some charterparty forms more or less free owners from liability for the cargo,
while others put a far-­reaching liability on owners in this respect. Sometimes, the
charterparty contains a paramount clause (see also sections 6.6.2, 6.6.3 and 10.6)
which makes the Hague Rules or Hague-­Visby Rules applicable only to the carrier’s (owner’s) liability for cargo under the charterparty, or to the whole charterparty,
or to the bills of lading issued under the charterparty, as the case may be.
11.10.1 Owners’ liability when voyage charterparty and bill of lading are
involved
Under many standard charterparties, as for instance the Gencon form, owners’
liability against cargo is very limited. But, as in most cases the master issues a bill
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V oyage charter
of lading with a more extensive liability for the owners, the arising question is
whether the charterparty or the bill of lading shall be decisive for the owners’ liability. The problem may be divided into two questions. The first is to what extent
the owners are liable against the receivers/­bill of lading holders? The second is
to what extent the owners can recover from the charterers if they are forced to
pay something to the receivers/­bill of lading holders for which they are not liable
under the charterparty?
11.10.2 Liability against cargo owners
The bills of lading usually contain a paramount clause, a jurisdiction clause and
some other clauses which may be contradictory to the clauses contained in the
voyage charterparty. To make clear that the charterparty – not the bill of lading –
is the governing agreement for the shipment, owners often insist on having a
clause inserted in the bill of lading with reference to the terms of the charterparty.
For instance, such an incorporation clause may have the following wording:
“All the terms, conditions, clauses and exceptions contained in Charter Party
dated. . . . . . . . . . . . between. . . . . . . . ., including the Jurisdiction clause, are hereby
expressly included in this Bill of Lading and are deemed to be incorporated herein.
All the terms conditions, clauses and exceptions contained in this Bill of Lading –
including the Paramount clause – are null and void to such extent as they are contrary to any provisions in the said Charter Party but no further ”.
It is doubtful up to what extent owners can rely on such a clause as regards
liability for cargo in relation to the consignee (who is not the charterer), as that is
contradictory to the rules contained in the Hague/Hague-­Visby Rules or similar,
prescribing a minimum liability for the carrier. However, the clause may be of
some value for other reasons, for instance in connection with demurrage claims or
when countries are involved which have not signed the bill of lading conventions.
To avoid difficulties with bankers when the payment for the cargo is made
by way of a letter of credit, owners should state in the charterparty that bills of
lading shall contain a clause referring to the charterparty. Unless the bankers are
instructed that such an incorporation clause is acceptable, they will not accept
the bill of lading.
When the receivers are also the charterers, the bill of lading will not have the
same effect as usual and the receivers/­charterers cannot claim against the owners
under the bill of lading as the charterparty is the main contract between them.
However, owners must always be aware that receivers/­charterers may transfer
the bill of lading to someone else who is not bound by the charterparty and therefore not prevented from claiming under the bill of lading.
11.10.3 Cargo retention clauses
In tanker voyage charters cargo claims often are caused from the peculiarities of
cargoes carried. Some shortage of cargo always occurs due to evaporation and
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sedimentation. The allowance for such losses should be determined by the custom of the trade. In oil cargoes an allowance of 0.5–0.75% to cover evaporation
and unpumpable sediment is considered acceptable. When there is a global environment of increasing oil prices, charterers seek to insert the so-­called “cargo
retention clauses” to the charterparty, which often have the effect of letting the
owners bear all such risks and payment of freight is based on the delivered weight
of cargo carried.
Some of the printed tanker charterparty forms do not include a clause of cargo
retention, but in most deals the contract will contain such a provision as a rider. It
is particularly important for an owner to ensure that a charterer’s right of deduction from freight is without prejudice to defences available to the owner. From
the charterer’s viewpoint, it is important to ensure that the cargo quantity remaining on board (ROB) should be “determined” or “established” by an independent
surveyor before any deduction from freight is made. The principles embodied in
Shellvoy 6 (see appendix 2, part II, clause 48 “cargo retention”) seem to protect
all legitimate interests of both parties.
11.10.4 Redress
If owners have to make payments for cargo claims under the bill of lading
to a greater extent than according to their liability under the charterparty, it
seems clear that under English law they are entitled to compensation from
the charterers. However, this is more a “legal right” than a “real right”, as
charterers rarely and very reluctantly will agree to such compensation. If the
owners intend to seek recourse against the charterers, they should make the
charterers aware of this from the beginning by inserting a redress clause into
the charterparty. As an example, the typical redress clause 1968 has the following wording:
“If one of the parties to this Charterparty has been obliged to make payment or
institute defence in respect of a claim by a third party, under a Bill of Lading or
otherwise, of a nature which, as between the parties, would have been the responsibility of the other party under the terms of this Charterparty, the latter shall
indemnify the former for all loss, damage or expenses resulting therefrom. However,
the indemnity payable under this Clause in respect of discharge of such claims shall
be reduced to the extent the party in question could have limited his liability if he
had been held liable directly to the claimant in the jurisdiction in which the claimant
proceeded against the other party”.
In Gencon ’94 (see appendix 1, part II, part of clause 10 “bills of lading”) this
problem is handled as follows:
“The Charterers shall indemnify the Owners against all consequences or liabilities
that may arise from the signing of bills of lading as presented to the extent that the
terms or contents of such bills of lading impose or result in the imposition of more
onerous liabilities upon the Owners than those assumed by the Owners under this
Charter Party”.
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11.11 Damage to the vessel
If the vessel is damaged as a result of bad weather, error in navigation or cargo
handling, collision with other ships, buoys etc., the owners will have little chance
of securing compensation from the charterers. Only if agreed, or in some cases if
the charterers are in breach of contract, or if they have acted negligently or fraudulently, may the owners have a possibility of recovering financial compensation
from the voyage charterers for such damage. The most common case of owners’
financial recovery is when the damage has been caused by an unsafe port or
berth, or by stevedores, or when the cargo has been injurious. The concept of safe
and unsafe ports and berths has been discussed above in section 11.3.2.
In cases of damage to the ship caused by the cargo, charterers’ description
of the cargo during the negotiations and in the charterparty is important. This
question has also been dealt with above in section 11.4. From the owners’ point
of view, it is important to have a satisfactory description of the cargo in the
charterparty and, as it is often difficult to judge beforehand whether the cargo will
be injurious or not, it is to the benefit of the owners having a general statement
in the charterparty to the effect that the cargo shall be non-­injurious to the vessel.
When the damage is caused by stevedores, it is essential from the viewpoint
of liability to ascertain whether the charterparty provides that the owners or the
charterers should arrange and pay for the loading and/­or discharging of the vessel
(see section 11.6). However, the fact that the charterers, according to the charterparty, must be responsible to arrange and pay for the loading and/­or discharging
of the ship does not automatically mean that the charterers are also liable for
damage caused by stevedores. The mere fact that the damage has been caused
by charterers, or someone employed by charterers, is in many countries not
itself sufficient ground for liability. Very often, negligence must also be proved.
Another complication is that damage to the vessel in connection with loading
or discharging may not be discovered until a long time after the damage has
occurred and in those cases it may be difficult for the owners to prove on which
voyage the damage occurred.
When the damage has been caused totally or partly by bad stowage, the owners face additional difficulties as the master has an obligation to supervise the
loading. Concerning stevedore damages, Gencon ’94 introduced a new important provision, not found in the previous version of Gencon ’76. This has the
following wording (see appendix 1, Gencon ’94, part II, clause 5(c) “loading/­
discharging – stevedore damage”):
“The Charterers shall be responsible for damage (beyond ordinary wear and tear) to
any part of the Vessel caused by Stevedores. Such damage shall be notified as soon
as reasonably possible by the Master to the Charterers or their agents and to their
Stevedores, failing which the Charterers shall not be held responsible. The Master
shall endeavour to obtain the Stevedores’ written acknowledgement of liability.
The Charterers are obliged to repair any stevedore damage prior to completion of
the voyage, but must repair stevedore damage affecting the Vessel’s seaworthiness or
class before the Vessel sails from the port where such damage was caused or found.
All additional expenses incurred shall be for the account of the Charterers and any
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Voyage charter
time lost shall be for the account of and shall be paid to the Owners by the Charterers at the demurrage rate”.
Similar problems may arise under time chartering and the reader can compare
with section 12.11.
11.12 Consecutive voyage charter
A consecutive voyage charter is a variation of a voyage charter in which a named
vessel is contracted for several voyages which follow consecutively upon one
another. It is a hybrid charter form as it contains both voyage and time charter
elements. This type of charter was discussed in section 7.3.4.
11.13 Voyage charter and liner business
Throughout this book it has been made clear that bulk and liner markets differ widely and structurally. From a chartering and shipbroking perspective, bulk
shipping is by far more significant than liner market. With respect to liner business, emphasis has been given to various aspects relevant to chartering matters or
similar. More specifically, structural differences between the two crucial sides of
ocean shipping were highlighted in section 1.1.3, the liner pricing aspects in section 2.2, the liner information network and people in sections 3.3, 3.4 and 3.5, the
shippers’ and carriers’ chartering policy and marketing strategy were discussed in
sections 5.1, 5.2 and 5.5, a distinction was made between liner and bulk shipping
from a chartering perspective in section 7.2, while the contracts of carriage were
examined in 7.4 and the cost allocation in 7.6. Thus, at this point, only the overlap
of the liner market with voyage chartering will be examined briefly.
Liner service might be regarded as a special form of a voyage charter agreed
on “liner terms”, i.e. where owners arrange and pay for loading and discharging
of the vessel. In fact, those two alternatives of a vessel’s trading are not so close
as it initially seems, having crucial differences which arise from the structural
divergence between bulk and liner markets.
A significant difference between a liner service and a voyage (spot) charter on
liner terms is that in voyage chartering the owner usually have one charterer per
vessel’s voyage, while in liner service the owners (called “carriers”) normally
have numerous “clients” per voyage which may be called “shippers” or “merchants” or “cargo owners”.
Therefore, in voyage chartering a shipowner and a charterer agree, via their
shipbrokers, to employ a vessel for a specific voyage in order to carry a specific cargo, and this agreement is commonly manifested in a voyage charterparty
which forms the contract of cargo carriage. The shipping service is tailor-­made,
executed on a “one ship – one cargo” basis and the charterer pays freight calculated in USD per ton of cargo carried. On the contrary, in liner service the
shipowner (carrier, operator) runs a regular shipping transport service between
more or less fixed ports and usually on a fixed time schedule. The liner operator
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V oyage charter
generally acts as a “common carrier”, accepting all general cargo (containers)
shipped between the ports covered by his service. Many shippers book the transport of their cargoes with a specific vessel which executes the regular shipping
transport services. The freight is commonly paid in USD per TEU or FEU. The
arrangement for the carriage of cargo is made via the agents of a particular shipping line and is manifested in a document called booking note (see appendix 11),
not in a charterparty. Both in liner and bulk shipping services, various forms of
bills of lading are issued and signed when the goods are received for shipment
or shipped on board. However, in liner market they are commonly called “sea
waybills” and are non-­negotiable (see sections 6.5.3 and 7.4).
Summing-­up, voyage charters as known in the open bulk market may be rarely
seen in the liner market, because the liner service itself, though executed on a
voyage-­by-­voyage basis, is founded on a completely different shipping transport
philosophy. Thus, it may be said that voyage charters are almost non-­applicable
to the liner market, particularly as far as the fully cellular containerships are
concerned.
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CHAPTER 12
Time charter
In this chapter, the most common type of period charter contract is examined; the
time charter. Typical clauses and critical matters are discussed. First, it is emphasised that the description of the vessel is more important, detailed and precise in the
time charter than in a voyage charter. Then, the importance of trading limitations is
highlighted, combined with an explanation of the “trip time charter” and “ballast
bonus” terms. Cargo aspects follow, together with a thorough discussion about the
period of the contract, the time, the place and the allocation of costs on vessel’s
delivery and redelivery, as well as the vessel’s last voyage and the overlapping/­
underlapping situations. A subject of considerable importance and dispute is then
analysed; hire and off-­hire. In addition, the crucial allocation of costs is commented
upon, as well as the key position of the master under a time charter. Analysis goes
further to deal with cargo liability allocation between owners and charterers,
another subject of major confrontation. Finally, the matter of a possible vessel’s
damage is addressed. The text is enriched with examples of clauses sourced from
standard forms of time charterparties; both dry and tanker. The reader may seek
to consult the glossary and the appendix at the end of the book, where necessary.
12.1 Definition
Time charter was initially described in section 7.3.2. In this part, only a short
definition of the time charter will be provided, before specific clauses and problems are further examined.
A time charter may be classified as one for hire of a certain vessel. In this
respect, the time charter differs considerably from the voyage charter, which is an
agreement for carriage of a certain cargo, with a certain vessel and for a certain
voyage. The character of a time charterparty as a hire agreement can be noticed
in several ways. The time charter is the most common form of a period charter.
In this type, the commercial use of the ship passes to the charterer for an agreed
period of time, which may be short, medium or long-­term. The owner keeps the
commercial operation of the vessel (crewing, insurance, repair and maintenance,
supplies, stores and lubricants), whilst the charterer undertakes the commercial
employment of the vessel, for instance the nomination of ports and the decision-­
making about the vessel’s trading, as well as the payment of voyage and cargohandling costs, such as bunkers, port charges, canal dues, extra insurances, stevedore expenses etc. It is worth emphasising, however, that navigation decisions
remain on the owner and the master. The charterer is obliged to pay the agreed
daily “hire” per time unit (instead of freight per ton of cargo as in the voyage
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Time charter
charter). The hire is paid at regular intervals, for example in USD per day, payable every 15 days or monthly in advance. Instead of a certain voyage and a certain cargo as per spot charter, a trading area and specific cargo types allowed to
be carried with the ship will be agreed in the time charter. Neither is the owners’
position against a third party the same in time chartering as in voyage chartering.
It is the time charterer who operates the ship commercially and thus he has the
closest contact with shippers, receivers etc. The time charter agreement is typically governed by a time charterparty. The standard documents are much less in
number than the respective voyage charter forms. This type of charter is common
both in bulk/­tramp trading (open charter market) and in the liner market.
For a discussion of various questions about time charters and an illustration on
different ways of approaching the respective answers, reference is made throughout this chapter and in the appendix to a well-­known tanker time charterparty
(Shelltime 4 in appendix 5), as well as to two reputable general purpose and dry
cargo time charterparties (Gentime in appendix 4 and NYPE 2015 in appendix 6).
It must be also highlighted that FONASBA (The Federation of National
Associations of Ship Brokers and Agents) has issued the Time Charter
Interpretation Code 2000, which is “an endeavour to interpret existing time
charterparty clauses, as well as to assist disputing parties where charterparties
are silent or non-­determining”. This is a rather self-­explanatory text, illuminating
critical aspects of time charters and included in appendix 7.
12.2 Vessel
12.2.1 Description of vessel
Generally, the description of the vessel is more important, detailed and precise
in the time charter agreement than in the voyage charter agreement. All details
about the ship (carrying capacity, cargo-handling equipment, construction, speed,
fuel consumption, nationality etc.) must be known by the charterers during the
negotiations with the owners. Charterers should form an accurate opinion about
the commercial value of the vessel and it is, therefore, important for them that
they have correct and sufficient information about her.
The normal situation in voyage chartering is that both cargo and ports are
known beforehand, thus owners and charterers can therefore pick out only those
details about the vessel that are relevant. In time chartering, the charterers may
sometimes know beforehand what cargo they will carry and what ports will be
used for loading and discharging, but more often they do not know beforehand
either the cargo to be carried with the ship or the trading areas and ports of call.
Therefore, the charterers cannot be happy only by receiving a few main details
about the vessel, as it is the case in voyage chartering.
In addition to the general data about the vessel (name, call sign, year of build,
nationality, IMO-number, GT and NT, draught, length and depth, number of
holds/­hatches etc.), charterers, especially when the ship will be chartered for
a long period, require a more detailed description. Therefore, they usually get
copies of the General Arrangement plan (GA-plan) or other ship documents
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Time charter
providing information about the ship and her construction. It is also important to
know about the vessel’s ice class and other special certificates.
An example of a diagrammatic description of a handysize bulk carrier may be
seen in Figure 12.1.
Figure 12.1 Diagrammatic Description of Vessel
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Time charter
Figure 12.1 (Continued)
12.2.2 Vessel’s cargo capacity
The ship’s cargo capacity is described in the same way as in the voyage charterparty
(see section 11.2.2), that is, in most cases by deadweight and/­or cubic capacity.
However, in many circumstances it may be necessary to have additional information about the vessel’s cargo capacity, for instance how many containers and how
many reefer containers a containership can take on deck and under deck.
The time charterers have at their disposal all compartments which can be used
for cargo. For example, in the Shelltime 4 form this is expressed in the following
way (see appendix 5, clause 10 “space available to charterers”):
“The whole reach, burthen and decks on the vessel and any passenger accommodation (including Owners’ suite) shall be at Charterers’ disposal, reserving only
proper and sufficient space for the vessel’s master, officers, crew, tackle, apparel,
furniture, provisions and stores, provided that the weight of stores on board shall
not, unless specifically agreed, exceed (to be filled) tonnes at any time during the
charter period ”.
When the ship has accommodation for passengers, it is usually also stated
whether or not the charterers have the right to use this space and what extra payment per passenger per day the owners are entitled to.
As information about the vessel’s cargo-­carrying capacity is very important for
the time charterers, the owners must declare these details as correctly as possible.
Incorrect information about the cargo-­carrying capacity may lead to deduction
of the hire or, when the difference is considerable, the charterers may also be
entitled to cancel the agreement on grounds of “misrepresentation” and claim
for damages.
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Time charter
12.2.3 Vessel’s speed and bunker consumption
This is a field of great dispute on time charters. As the charterers pay hire per
time unit, the vessel’s speed capability and bunker consumption are essential
for judging the operating and chartering potential of the vessel. The speed and
bunker consumption statements in the time charterparties are usually connected
to certain weather conditions and ship’s draught. In Gentime (see appendix 4,
part I, box 5 “vessel’s description”), the base for the vessel’s speed capability is
described as follows:
“Speed and Consumption on Summer dwt in good weather, max. windspeed 4 Bft ”.
The type of fuel is also important. In Gentime, specification of fuel oil is
given in part I, box 23 “fuel specifications” and part II, clause 6(d) “bunkers –
bunkering” (see appendix 4). In view of the fact that vessels are often ordered
to proceed with “economical speed ” or “low speed ”, it is recommended that not
only consumption on full speed is stated in the charterparty; consumption on
“economical speed” and “low speed” should also be agreed.
In accordance with English law, a speed clause is generally not understood to
be a continuing warranty of the ship’s speed capability and bunker consumption
during the whole time charter period, unless that is clearly stated in the contract.
In accordance with established principles (as set out in The Apollonius [1978]
1 LLR 53 and re-­confirmed in later decisions), it seems that the speed warranty
applies – in the absence of an express stipulation that the warranty is to apply
throughout the duration of the charter – no later than the time of delivery of
the vessel under the charter. To impose a continuing warranty as to the vessel’s
performance, an express provision is required. In the absence of that, the performance warranty applies only at the time of delivery into the charter service. This
may be reinforced even by specific wording of some charter documents, where
it is agreed that only during the negotiations or at the time of the fixture or at the
time the vessel enters into service under the charterparty, she is capable of steaming at the stated speed on the stated consumption.
On the contrary, as the matter of the continuity of performance warranty is
rather controversial and historically a ground for dispute, it must be said that
most standard time charter forms impose on the owner a duty to maintain the
ship throughout the charter period and the master has a duty to prosecute his voyages with utmost despatch (for example, see NYPE 2015, clause 6(a) “owners
to provide” and clause 8(a) “performance of voyages” in appendix 6). These
clauses imply that the ship has to maintain her warranted performance, during
good weather periods, throughout the charter period and this is now a generally
accepted principle in London proceedings as a matter of English law.1
This view is not only supported by the FONASBA Time Charter Interpretation
Code 2000 which states that the speed warranty shall apply for the duration of
1 Furmston, O. and Hosking, B. (2015) Speed and Performance Claims (The Standard Club,
March 2015, www.standard-­club.com).
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Time charter
the time charter irrespective of the vessel being fully or partly loaded or in ballast
(see appendix 7), but also by the relevant provision of the recently published
NYPE 2015 (see appendix 6, clause 12(a) “speed and consumption”) which stipulates as follows:
“Upon delivery and throughout the duration of this Charter Party the Vessel shall
be capable of speed and daily consumption rates as stated in Appendix A in good
weather on all sea passages with wind up to and including Force four (4) as per
the Beaufort Scale and sea state up to and including Sea State three (3) as per the
Douglas Sea Scale (unless otherwise specified in Appendix A). Any period during which the Vessel’s speed is deliberately reduced to comply with the Charterers’
orders/­requirements (unless slow steaming or eco speed warranties have been
given in Appendix A) or for reasons of safety or while navigating within narrow or
restricted waters or when assisting a vessel in distress or when saving or attempting
to save life or property at sea, shall be excluded from performance calculations”.
In general, as the vessel’s good performance is important for the time charterers during the entire charter period, they often try to get the speed described as
“average service speed ” or similar in the charterparty. Furthermore, in the modern tanker time charterparty forms, the technique in construing the speed clause
is usually more like the one used in a voyage charterparty. Here, the weather
risk at sea is put on the owners and the speed/­consumption factor is described in
great detail, as for example in Shelltime 4 (see appendix 5, clause 24 “detailed
description and performance”).
Speed capability should always be connected with bunker consumption and,
when the charterers scrutinise the log abstract to find out the vessel’s performance, they must look at both speed and consumption. Speed claims, that is,
claims based on low speed/­high bunker consumption, are often complicated and
difficult to negotiate. In most cases considerable amounts are involved and the
parties should therefore be careful when they draw up the charterparty clauses.
A particular problem regarding speed and bunker consumption is bottom
growth on the vessel. When the vessel has been idle for a long period in tropical areas, the speed capability will be reduced considerably. Some charterparties
have special clauses dealing with this problem. In the new time charter form
NYPE 2015, this is developed in clause 30 “BIMCO hull fouling clause for time
charter parties” (see appendix 6).
12.2.4 Vessel’s seaworthiness and maintenance
The shipowners’ obligations as regards the vessel’s seaworthiness have been
dealt with before in different contexts (for example see section 10.4.3).
In the time charter agreements it is often expressly said that the owners shall
deliver the ship to the charterers in a seaworthy condition. For instance, in the
Gentime form (see appendix 4, part II, clause 11 “owner’s obligations”) it is said
that: “the Owners shall deliver the Vessel . . . in a thoroughly efficient state of
hull and machinery and shall exercise due diligence to maintain the Vessel . . . in
every way fit for the service throughout the period of the Charter Party”.
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Time charter
Therefore, for both the charterers and the owners it is important not only that
the vessel is delivered in accordance with the agreement and in a seaworthy condition, but also that it should be kept in the same good order and condition during
the charter period. When the charter agreement covers long periods, it might be
advisable to make this clause a little more specific. In this connection, clauses
dealing with liability for damage to the vessel or other clauses concerning liabilities and exceptions from liabilities must also be considered.
Even without an express agreement to that effect, the shipowner will have a
duty with respect to seaworthiness and maintenance. In English law, the owners’
warranty of seaworthiness is implied, unless anything to the contrary is stated in
the charterparty.
12.3 Trade
12.3.1 Geographical limits
It has already been mentioned that the hull and war risk underwriters dictate
certain limits for the vessel. Time charterparties usually contain additional limits
for the trading. Basically, it is the time charterers who direct the vessel. In the
Gentime form (see appendix 4, part II, clause 13 “charterers’ obligations”), this
is expressed, among other terms, in the following way:
“The Charterers shall furnish the Master with full and timely instructions”.
Instructions must be given subject to the limits of the charter. The “limit of the
charter” usually includes several kinds of limitation. The owners must, in the first
place, ensure that those limits stipulated by the underwriters are also included in
the time charterparty. This is usually done by using the wording “. . . but always
within hull underwriters’ trading limits” or similar. It must be noted that a reference to Institute Navigating Limits (INL) is not always sufficient as other limits
may be used by the underwriters.
In the war risk clause it is also often stated that the owners and the master
“have liberty to comply with any orders . . . given by any committee or person
having under the terms of the war risk insurance on the vessel the right to give
any such orders or directions”.
Additional limitations contained in the concept “limits of the charter” are for
various reasons usually inserted. One reason may be that the owners do not want to
have the ship trading too far from the home country, as this will cause extra costs
for the crew. When the trading limits cover a large area, for instance “worldwide
trading always within INL and excluding following countries . . .”, the owners
sometimes wish, for financial reasons, to have a written undertaking from the charterers’ side that the ship will visit its home country or countries near its home country once or twice a year for changing of crew, drydocking, etc. Such a clause may
have the following wording: “Vessel to call Europe twice a year evenly spread ”.
Very often there are also political reasons for trading limitation. Some countries do not accept vessels which have earlier traded with other countries or are
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Time charter
owned or controlled by persons or companies from certain other countries. To
avoid difficulties, trading exclusions may be agreed in the charterparty.
A general recommendation, as far as geographical concepts are concerned, is
that wordings like “southern Europe” or “Baltic in season” should be avoided,
as it is difficult to find out what areas they really cover. It is better to mention the
various countries included or excluded or to give specific geographical limits.
When the wording “in season” is used, the season should be specified.
It is worth pointing out that geographical descriptions, often abbreviated, are
forming a crucial part of chartering communications. The reader may find many
of the internationally established geographical abbreviations in the glossary, for
example “ARA: Amsterdam – Rotterdam – Antwerp: (geography) Selection of
European ports of call” or “Continent: (geography) It includes ports or places in
the European continent from Bordeaux in south to Hamburg in north, including
both of them and Rouen”.
12.3.2 Non-­geographical limits
For those trades, countries and ports which are within the geographical limits,
there are usually further trading limitations of a non-­geographical nature. The
following clause is from Gentime (see appendix 4, part II, clause 2(a) “trading
areas – trading limits”):
“The vessel shall be employed in lawful trades within Institute Warranty Limits
(IWL) and within the trading limits as stated in Box 13 between safe ports or safe
places where she can safely enter, lie always afloat, and depart ”.
According to this clause, the vessel shall be used only for lawful cargo in lawful trades. This means that the trade and the cargo must be lawful, not only by the
law of the countries where the loading and discharging take place, but also in the
country where the ship is registered and by the law governing the charterparty.
Ports shall be safe (see above, section 11.3) and the ship shall, as agreed by
the parties, either “lie always afloat ” or “always afloat or safely aground where it
is customary for vessels of similar size or draught to be safely aground ”. NYPE
2015 (see appendix 6, clause 1(d) “duration/­trip description”) gives an option to
the charterers to order the vessel to load or discharge at a place where she “may
lie safely aground ”. The clause is not applicable if the space intended to fill in
ports or areas is left blank.
Further to this provision, there is usually a clause dealing with ice and other
difficulties or dangerous situations. Such a clause, often found under the title
“excluded ports” or similar, can have the following wording (Linertime 2015,
clause 17 “excluded ports”):
“The Vessel not to be ordered to nor bound to enter:
(a) any place where fever or epidemics are prevalent or to which the Master,
Officers and Crew by law are not bound to follow the Vessel;
(b) any ice-­bound place or any place where lights, lightships, marks and buoys are
or are likely to be withdrawn by reason of ice on the Vessel’s arrival or where
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there is risk that ordinarily the Vessel will not be able on account of ice to reach
the place or to get out after having completed loading or discharging. The
Vessel not to be obliged to force ice, nor to follow ice-­breakers when inwards
bound. If on account of ice the Master considers it dangerous to remain at
the loading or discharging place for fear of the Vessel being frozen in and/­or
damaged, he has liberty to sail to a convenient open place and await the Charterers’ fresh instructions. Detention through any of above causes to be for the
Charterers’ account ”.
The intention behind the first section of the clause is to protect the crew against
fevers and epidemics. The next section is the ice clause which is self-­explanatory
(see discussion of ice clauses in section 11.3.4). The war clause also sometimes
limits the charterers’ rights to use commercially the vessel (see discussion of war
clauses in section 10.7).
12.3.3 Breaking of trading limits
If the time charterers wish to direct the vessel to ports or places outside the trading limits of the charterparty, they must firstly get permission from the owners,
who should sometimes seek permission from the insurance underwriters.
A wording stating that “the charterers have the right to break vessel’s trading limits provided they pay the extra insurance premiums” can be found in the
time charterparties. Such a provision is not acceptable from the owners’ point of
view, as they cannot provide in advance an “open” permission to the charterers
to break the trading limits. Each time the question arises, the underwriters must
be consulted and a special agreement between the charterers and owners should
be drawn up. In such agreements, not only the costs for extra insurance premiums
should be considered, but also the risk of delay and physical damage to the vessel.
12.3.4 Requirements of the trade
As it is important for the charterers that they can use the vessel within the trading
limits and without disturbances, they often insist on clauses such as:
“Owners to ensure both that the Vessel is provided with such technical equipment
and certificates, and that the terms and conditions on which the Master, Officers and
Crew are engaged are such, as are necessary to avoid any delay or hindrance with
respect to the use of the Vessel within the trading limits”.
Clauses like this may create difficulties for the owners, especially when new
regulations are introduced. Therefore, a solution may be that owners and charterers agree that owners’ obligations in this respect are limited to rules and regulations in force when the charterparty is agreed.
12.3.5 Trip time charter
When the ship is chartered on time basis, but for a specified trip, this hybrid
type of charter is called “trip time charter” or “time charter trip”, as it combines
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elements of voyage and time chartering. In a time charterparty, a clause as the
following is sometimes used instead of usual trading limits, to transform a typical
time charter in a time charter trip:
“One time charter voyage with loading 1 or 2 ports in Sweden and discharging 1
or 2 ports in Brazil. Redelivery on dropping outward pilot2 at last discharging port.
Total period estimated to 30 days”.
NYPE 2015 (see appendix 6, clause 1(a) “duration/­trip description”) reflects
the parties’ possibilities to choose whether the agreement will be for a specific
period or for a specific trip.
As always, when the basic principles are set aside, the parties must look
through the other clauses of the charterparty and make necessary amendments
in order to keep a solid charter contract. Most standard time charterparty forms
have a clause giving the owners an opportunity to claim additional hire for the
last voyage under the charterparty, if the vessel is not redelivered in due time.
The wording of these clauses is not suitable for trip time chartering and should
thus be amended, for example by stating that the charter hire is applicable only
for 30 days (in the above-mentioned example) and that the owners are entitled
thereafter to the market rate if higher than the charter rate.
Sometimes, the charterparty contains both ordinary trading limits and a
description of a time charter trip, for instance:
“World-­wide trading within INL3”,
combined with
“One time charter trip from UK to one or two ports Spanish Mediterranean coast”.
In such a case, are the charterers then entitled to send the vessel from the UK
via Norway to the Spanish Mediterranean coast? The answer is difficult to find
and such confusing combinations of clauses should be avoided. In this example,
if the intention is to send the vessel directly from the UK to Spain, the words
“worldwide trading” should not be inserted. On the other hand, if the intention is
that the charterers should have a possibility of sending the ship to other places,
the trip UK/Spain should not be mentioned at all in the charterparty, or only be
mentioned as a non-­binding intended voyage.
12.3.6 Ballast bonus
It goes without saying that it is advantageous for the time charterers if the vessel
is delivered at a place where it can be loaded immediately. Similarly, it is to the
advantage of the owners if the vessel is redelivered at a place where it can easily
2 See DOP in the glossary.
3 See INL in the glossary.
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get a new cargo or a new charter at a good rate. As a consequence of this, the
delivery and redelivery ports or places are often reflected in the economic calculation and in the hire.
Instead of having the hire influenced by delivery and redelivery positions, the
parties sometimes agree about a ballast bonus to be paid. For instance, if a vessel is planned to be finally discharged under the time charter at port X, the time
charterer most probably also wishes to redeliver her at port X. Presuming it is
impossible to find a new cargo at port X and the nearest port where cargo is available is town Y, ten days’ steaming from port X, the owner must consider the ten
days’ steaming time and the relevant bunker consumption from port X to town
Y in his calculation for the time charter. This can be done in several ways. One
alternative is that the vessel continues on charter and is not redelivered until her
arrival at town Y. However, the parties may agree instead that the vessel shall be
redelivered at port X and that the owners shall get a lump sum compensation – a
“ballast bonus”4 – for the theoretical steaming time and the bunker consumption
cost from port X to town Y. Such a ballast bonus may also be converted to hire
and added to the hire for the actual charter period.
The advantage of ballast bonus, either paid as a lump sum compensation or
added to the ordinary hire, is that the parties are discharged from their obligations
and liabilities during the ballast bonus-­covered period and voyage. This means,
for instance, that the charterers are not liable for the safety of ports and channels
and bear no financial risk for the delay of the vessel by bad weather, strikes of
pilots or similar occurrences. The owners are free to do what they wish with the
vessel and, in this specific example, they are not obliged to direct her to town Y.
Depending on the circumstances, ballast bonuses can be paid by the owners to the
charterers or vice versa, at delivery and/­or at redelivery of the vessel.
12.4 Cargo
12.4.1 Type and specification of cargo
Apart from the trading limits, the most important restriction as regards the time
charterers’ freedom to use and direct the ship is the restriction on cargoes to be
carried by the vessel. In the first place, the type of vessel is decisive for the kind
of cargo to be carried. Some vessels are specially built and equipped for one kind
of cargo only and in such a case this should be stated in the charterparty. Other
ships can take a limited number of cargo types and also in this case the best way
is to specify them in the charterparty. However, many ships are intended and
suitable for many kinds of cargo and in those cases time charterparties usually
describe the accepted cargo as, for instance, “lawful merchandise non-­injurious
to the vessel ”, or “ordinary dry cargo non-­injurious to the vessel” or similar. It
is worth noting the difference compared with the voyage charterparty, where the
description and specification of the cargo have a more central position.
4 See also BB in the glossary.
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12.4.2 Excluded cargo
Sometimes, the general description of cargo accepted for the vessel will, by
itself, exclude some cargoes. For instance, if the general cargo description is
“lawful merchandise non-­injurious to the vessel ”, then all unlawful and injurious
cargoes are not allowed. In addition, the printed charterparty forms usually also
contain a specification of cargo that is excluded from carriage. As an example,
see appendix 4, Gentime, part II, clause 3 “cargo – restrictions and exclusions”.
12.5 Period
12.5.1 Length of period
Time charterparties regularly contain a clause stating the length of the charter
period. The basic period agreed is called “flat period ”. The traditional way to
describe the charter duration is to fix a certain period. For instance, the first line
of clause 1 in Gentime form reads “the Owners let and the Charterers hire the
Vessel for the period/­trip(s) stated in Box 6”, where box 6 refers to the “period
of charter”.
Another alternative is to agree that the vessel shall perform one or several fixed
voyages, as described in section 12.3.5 regarding trip time chartering.
As it is difficult to determine exactly beforehand when the ship will be redelivered to the owners, the charterparties usually have a certain built-­in flexibility. Both
the flat period and the redelivery date are often described together with the word
“about ”. It is also possible to state a certain flat period or a certain redelivery date
with the addition “± 15 days in charterers’ option” or similar. Combinations of these
two methods or other stipulations are also found. When establishing the meaning
of “about ”, several factors will be considered, but particularly decisive will be the
length of the “flat period”, or the length of the voyages embraced by the charter
period. When the charterers have an optional right to prolong the charter period,
such options are normally for the benefit solely of the charterers. If the market rate
goes down during the charter period, the charterers will probably not use their option
and the owners will have to find new employment for the vessel. The charterers may
choose another ship, or perhaps the same ship, at a lower hire rate than in the old
charter. If the market rate has gone up, the charterers will probably use their option
as, in that way, they get the vessel at a rate lower than the prevailing market rate.
Especially when there is a big gap between the market hire and the charterparty hire, disputes easily arise concerning the length of the period. If the
charterparty hire is higher than the market hire, the charterers try to redeliver the
ship as soon as possible, whereas if the charter hire is lower than the market hire,
they try instead to keep her for as long as possible.
12.5.2 Overlap/­underlap – last voyage
The vessel is sometimes redelivered to the owners before and sometimes after the
agreed redelivery date or period. In the first case there is an underlap situation
and in the latter an overlap.
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Time charter
The owners cannot refuse to take the ship if the charterers redeliver her earlier
than they are entitled to, in spite of this being a breach of contract on the charterers’ side. The owners have an obligation to try to minimise their loss by seeking
alternative employment for the vessel, but if they fail or if they get lower revenue
compared with the previous charter, they are entitled to compensation from the
charterers. Nevertheless, it is not always clear how this compensation should be
calculated.
When the charterers are planning the last voyage for the ship under the time
charter, they must take into consideration that she has to be redelivered in accordance with the agreement in the charterparty. As it is often difficult to plan or estimate exactly when the vessel will be redelivered, the charterparty forms usually
have a special clause about the last voyage. In the Gentime form (see appendix 4,
part II, clause 4(d) “redelivery – last voyage”), this is dealt with as follows:
“The Charterers warrant that they will not order the Vessel to commence a voyage
(including any preceding ballast voyage) which cannot reasonably be expected to
be completed in time to allow redelivery of the Vessel within the period agreed and
declared as per clause 1(a). If nevertheless such an order is given the Owners shall
have the option; (i) to refuse the order and require a substitute order allowing timely
redelivery; or (ii) to perform the order without prejudice to their rights to claim
damages for breach of charter in case of late redelivery. In any event, for the number
of days by which the period agreed and declared as per clause 1(a) is exceeded, the
Charterers shall pay the market rate if this is higher than the rate stated in Box 24”.
According to this clause, the owners are entitled to the market rate for the overlap period if the market rate is higher than the rate stipulated in the charterparty.
If the market rate is lower than the charterparty rate, the latter rate will apply also
for the overlap period. It is noted that this clause does not mean that charterers
are free to prolong the charter period. This is also a question that has to be taken
into consideration in connection with time charter trips.
12.5.3 Extension of flat period due to off-­hire periods
Charterers are not entitled to an extension of the flat period because of off-­hire
periods which occurred during the charter, unless this is expressly stated in the
charter agreement. If such a clause is inserted, it is advisable to state also the latest
time by which the charterers must notify the owners that they intend to exercise
their option to extend the charter period. Furthermore, the hire for the additional
period should be determined, as well as the question of whether possible off-­hire
during the extension period will give the charterer a right to additional extension.
12.5.4 Delivery and redelivery of vessel
A charter period is demarcated by the delivery to and redelivery from the time
charterers. In respect to delivery and redelivery, several questions arise which
must be dealt with in the charterparty.
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In Gentime (see appendix 4, part II, clause 1(b) & 1(c) “period and
delivery – delivery place & delivery time”) the vessel’s delivery is described
as follows:
“. . .
(b) Delivery Place: The Owners shall deliver the Vessel to the Charterers
at the port or place stated in Box 8 or a port or place within the range
stated in Box 8.
(c) Delivery Time: Delivery shall take place no earlier than the date/­time
stated in Box 9 and no later than the date/­time stated in Box 10. Delivery shall be effected at any time day or night, Saturdays, Sundays and
holidays included ”.
In addition, Gentime outlines the vessel’s r